With new provincial and federal governments, dropping oil prices, rising unemployment rates, and economic growth rates jumping all over the place, Albertans have dealt with plenty of economic changes this past year. All of these changes have led to not only a feeling of economic uncertainty, but also to a change in the way many people will file their taxes. Depending on where you sit financially, there are a few different ways you can adjust your tax return to save as much as possible based on the current tax rules.
Here are a few important factors to keep in mind as you head into the wonderful and terrifying world known as tax season.
Changes in Marginal Tax Rates for 2016
Because of the changes in provincial and federal governments last year, Albertans’ tax brackets will be getting a major shake-up in 2016. These changes don’t come into effect until the 2016 tax year, however, which means that depending on where you sit, you may want to either claim as much income as possible this year before your marginal tax rate goes up, try to defer claims until next year in order to put yourself in a lower tax bracket when the changes hit next year, or use some combination of both strategies.
“You may want to consider claiming as much income as possible this year to avoid paying more taxes next year.”
When to Claim Extra Expenses
High income earners will see the biggest changes to their taxation level in 2016. Albertans who earn $300,000 or more in 2016 will be taxed at a rate of 15% next year, as opposed to the 11.25% rate they’ll pay this year. In addition, federal tax rates for those earning over $200,000 will increase from 29% to 33% in 2016. This could add up to as much as a 9% increase for high income earners in Alberta.
If you fall into this earnings category, you may want to consider claiming as much income as possible this year to avoid paying more taxes next year. You can do this by claiming items like investment income and capital gains early. This will lead to a higher tax bill this year, but could turn into major savings down the road.
When to Defer Claims
At the same time, you may also want to consider deferring certain claims until next year in order to put yourself in a lower tax bracket in 2016. For example, even if you contribute to your RRSP regularly, you’re not required to report that contribution every year. Instead, you could defer that deduction amount until 2016 if you think it will help slide you into a lower tax bracket. Depending on where you sit, you may also be able to undertake similar strategies with claims like capital losses, charitable returns, and medical expenses.
Prepare for Potential Surprises
No one likes to be surprised when they get their tax return back. That’s why it’s important to know exactly what you’re going to be taxed on. Albertans who received Employment Insurance (EI) benefits this year should be aware that this qualifies as taxable income. However, regardless of what tax bracket you end up in, EI earnings will only be taxed at 10%.
“Any money you received from the UCCB program in 2015 will count towards your overall income this year.”
Understand the Family Tax Credits
Another type of taxable income that some people aren’t aware of is the Universal Child Care Benefit (UCCB). While this benefit will be replaced with a different family tax credit next year, any money you received from the UCCB program in 2015 will count towards your overall income this year. This could push you into a higher tax bracket, depending on how much you made in 2015.
On the other hand, you may be able to offset this taxation by taking advantage of other programs designed for families like the Family Tax Cut income splitting program. The Family Tax Cut works well for couples with different income levels; this program allows the higher earning partner to transfer up to $50,000 of their income to the lower-earning partner. In extreme cases, this can lead to a maximum tax savings of $2,000.
The federal government also offers a number of other family tax benefits including a tax deduction for childcare expenses, a deduction for family caregiver expenses, deductions for education expenses, and children’s fitness and arts tax credits. Claiming as many of these benefits as you can will allow you to further offset your taxation amount.
For more on how to make the most of your tax return this year, check out our income tax cheat sheet, or learn how to make your mortgage tax deductible using the Smith Manoeuvre.
Ready to get your finances in order? Contact us today to talk to one of our financial planners.