How to spend your tax refund
THE STACK #41So you just got a sizeable refund, and you don’t know how to best maximize it? First of all, congrats! This means you made good use of your tax deductions and credits.
In today’s issue of The Stack, I will share some of the ways you can use your tax refund to maximize it.
THE STACK
Why did I get a tax refund?
When the amount of taxes you pay throughout the year is greater than the amount you owe, you receive a tax refund.
You can reduce the amount of taxes you owe by applying tax deductions and tax credits. (You can learn more about these in the knowledge section).
However, your tax refund isn't a gift from the government. It simply means you paid more taxes than you owe and the CRA held onto that extra amount for a few months before returning it to you once you filed your taxes. In other words, it's an interest-free loan that you gave to the CRA.
Once you get your tax refund, it's essential to use it wisely. Here are some ways you can make the most of your tax refund:
Get caught up on bills
If you have outstanding bills, you can use your tax refund to catch up and break the cycle of living paycheque to paycheque.
Pay your yearly premiums
You can use your tax refund to pay off your yearly bills. This includes your auto insurance, home insurance, subscriptions, property taxes, memberships, or professional dues. By paying off your yearly bills, you can increase your monthly cash flow because you have reduced the number of monthly bills you pay.
As a business owner with an irregular income, I prefer to pay most of my bills yearly. This way, I have one less bill to worry about during months when my revenue might be low.
Pay off high-interest debt
Using your tax refund to pay off high-interest debt, such as credit cards, can help you pay off debt faster, reduce interest payments, and increase your monthly cash flow.
Build your emergency fund
It's important to have an emergency fund that can cover unexpected expenses. Depending on how much you receive, you can use your tax refund to start, top up, or fully fund your emergency fund.
Use it towards a big goal
If you have a significant goal that you have been delaying, such as taking a vacation, purchasing a fancy gadget, or renovating your home, you could use your tax refund to achieve those goals.
Alternatively, you could start a sinking fund, which is a separate savings account focused on achieving a specific goal.
Invest in your TFSA
One of the best ways to use your tax refund is to invest it in your Tax-Free Savings Account (TFSA). This has been a successful investment strategy for me for several years.
As a high-earner, I prioritize my Registered Retirement Savings Plan (RRSP) during the year. When I receive my tax refund, I put the entire amount into my TFSA to maximize its contribution limit.
By utilizing both my RRSP and TFSA, I can better manage how much I withdraw from my RRSP at retirement to minimize taxes and maintain tax efficiency.
THE TOOL
Use the Form T1213 to reduce your tax deductions at source
I mentioned earlier that a tax refund is essentially an interest-free loan that you give to the CRA. If you always receive a sizable refund, it means that your employer is withholding more taxes than necessary.
To avoid this, you can fill out the T1213 form and ask your employer to withhold less tax, which will increase your take-home pay. This extra money can be used for your RRSP contributions and other tax deductions.
By using the T1213 form, you can ensure that you're using your income efficiently by investing it throughout the year and allowing it to grow rather than leaving it in the hands of the CRA and doing nothing for a year.
If you need help filling out the T1213 form, I've explained it in detail in this post.
THE ACCOUNTABILITY
What are some ways you have used or will use your tax refund? Reply to this newsletter and let me know.
THE COURAGE
THE KNOWLEDGE
Tax Deduction
A tax deduction reduces the amount of your income that is subject to tax
A tax deduction lowers your taxable income by subtracting eligible expenses from your income.
For example, if you earn $50,000 a year and have $5,000 in tax deductions, your taxable income will be reduced to $45,000. This means you will pay less tax because you are taxed on a lower income.
There are various types of tax deductions that can help reduce a person's taxable income. Here are some examples of tax deductions:
1. Charitable donations
2. Medical and dental expenses
3. Education expenses
4. Home mortgage interest payments
5. State and local taxes
6. Business expenses
7. Retirement Retirement Savings Plan (RRSP) contributions
8. First-Home Savings Account (FHSA) contributions
9. Job search expenses
10. Casualty and theft losses
11. Real estate taxes
Tax Credit
A tax credit reduces the amount of tax you owe directly. A tax credit is a dollar-for-dollar reduction in your tax bill.
For example, if you owe $5,000 in taxes and are eligible for a $1,000 tax credit, your tax bill will be reduced to $4,000.
There are various types of tax credits available in Canada. Some common examples of tax credits include:
1. Canada Child Benefit (CCB)
2. Child Disability Benefit (CDB)
3. Goods and Services Tax/Harmonized Sales Tax (GST/HST) Credit
4. Disability Tax Credit (DTC)
5. Medical Expense Tax Credit (METC)
6. Canada Workers Benefit (CWB)
7. First-Time Home Buyers' Tax Credit (HBTC)
It is important to note that not all tax deductions and tax credits apply to everyone, and some deductions have specific requirements and limitations. It is recommended to consult a tax professional to determine which deductions apply to your specific situation.
That’s all for this week; I’ll talk to you at the same time next week but until then…..
Keep Stacking!
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