2018 is quickly coming to close, which means it is time to start thinking about those last-minute tax planning strategies to help minimize your 2018 tax owing.
Three of the most common last-minute tax planning strategies to consider are charitable donations, medical expenses and RRSP contributions.
While your decisions for charitable donations and medical expenses must be made by the year end, in most cases, you have until March 1 to decide what you will do when it comes to your RRSP contributions. For this reason, we will focus on the first two and save RRSP contributions for another day.
Both the Federal and Provincial/Territorial governments offer tax credits for donations made to registered charities between January 1 and December 31 of each year.
The amount you will receive as a tax credit depends on:
The Federal government offers a 15% non-refundable tax credit on the first $200 of donations. For most Canadians, any donations you make over the $200 threshold, you will receive a non-refundable tax credit of 29%. If, however, you have a taxable income of $205,843 or more, the federal non-refundable tax credit is 33%.
It is important to note that while the charitable donation tax credit is non-refundable, it can be carried forward for up to five years.
Because of the structure of this credit, if you have already donated this year and are planning to donate to a registered charity in the next couple of months, it is recommended that you make them before the end of the year, especially if it would make your total donations for the year greater than $200.
You have donated $200 this year and are planning to donate another $300 in the next couple of months.
If you make the donation in 2018, your tax credit for 2018 would be $117.
2018 - ($200 x 15%) + ($300 x 29%) = $30 + $87 = $117
Total Tax Credit = $117
If you choose to wait until 2019, your total tax credits in 2018 and 2019 would be $75.
2018 - ($200 x 15%) = $30
2017 - ($300 x 15%) = $45
Total Tax Credit = $30 + $45 = $75
That means the cumulative donations of $500 will create an additional tax credit of $42 by donating it all in the same year.
When claiming charitable donations as a tax credit, it is important to remember that donations made by you or your spouse can be claimed on a single return. In most situations, it makes sense for the spouse with the higher income to claim these donations.
If you have eligible medical expenses that are not fully covered by a provincial health care plan or benefits plan, you may be able claim a tax credit for the portion paid out of pocket.
For most Canadians this includes dental care, prescription drugs, ambulance trips, and many para-medical services such as a physiotherapist, chiropractor or therapist. Keep in mind, if you do have a benefits plan that covers only a portion of these costs, you can claim the amount you have not been reimbursed for.
You go to the dentist and incur a bill of $200. Your benefits plan covers 80% of the cost which means you are reimbursed for $160 ($200 x 80% = $160). The remaining $40 ($200 - $160 = $40) can be included in your calculation for the medical expense tax credit.
Generally, taxpayers can claim a tax credit on eligible expenses which exceed 3% of the taxpayer’s income or $2,302, whichever is higher.
You have $3,000 worth of eligible medical expenses paid out of pocket. Your income for the year was $45,000.
$45,000 x 3% = $1,350
Because 3% of your income is less than $2,302, you can claim $1,650 of your medical expenses ($3,000 - $1,350 = $1,650)
If, however, your income is $80,000, you would only be able to claim $698 of those medical expenses ($3,000 - $2,302 = $698) because 3% of your income is greater than the $2,302 threshold.
$80,000 x 3% = $2,400
Similar to the charitable donations tax credit, either spouse can claim eligible medical expenses paid out of pocket. This includes expenses paid for dependent children born in 2001 or later and other dependent relatives.
Unlike the charitable donation tax credit where you must claim donation made between January 1 and December 31 of the current tax year, you can claim eligible medical expenses for any 12-month period ending in the current tax year. This means that you as the taxpayer must determine which 12-month period will maximize your credit.
For more information on the charitable donation and medical expense tax credits, or for help determining how to optimize your tax credits, contact us today.