Save your Taxes
Posted by Gail | Filed under Taxes
People are always telling me why they can’t save. In the next breath they tell me about the tax refund their getting. And when I asked who was getting refunds, 75% of the people who responded said they were getting money back.
Why would you give the government an interest-free loan? Don’t the 38% of people who “got back a big refund” realize that they could be earning interest on that money they’re lending to the government interest-free. It may not be a lot of interest, but 2% is still better than 0%.
Want to keep more of your money in your pocket where it’ll do YOU some good?
Here’s a form that very few people use, but is remarkably useful for keeping money out of the government’s hands: Form T1213. This form let’s you request permission from the Tax Man to have your employer reduce the amount of income tax taken off of your paycheque every month.
If you can demonstrate that you’re eligible for certain recurring deductions that will reduce your tax bill at the end of the year – you can trade in your tax refund for more take-home pay. Do you make monthly RRSP contributions by way of pre-authorized withdrawal? You’re eligible. How about child-care expenses? If you’re tithing monthly you can do it for your charitable donations. If you have rental losses, interest expenses on investment loans or carrying charges, those are eligible too.
You’ll have to fill out the form and send it to the Tax Man each year. And NOW is the perfect time for 2012. Once you’re approved, the Tax Man will provide instructions by letter to you, which you then give to your employer, who will adjust your pay for the remainder of the year.
Fill out Form T1213 and get the Tax Man’s approval and instead of paying extra tax and getting refunded, you’ll pay less tax on an ongoing basis so you’ll have more cash that you can then use to establish an automatic savings plan. Whether you send that money to your RRSP, your TFSA or your high-interest savings account, it’s way better in your hands than in the tax man’s.
December 5, 2011 at 7:00 am
Mathematically this is absolutely right. As long as you consciously DO something constructive with that little bit extra on your paycheque. I would worry through, that the benefit is lost for anyone who’s still a little undisciplined about saving, or paying down debt. An extra $50 on each of the next 26 paydays might be frittered away, whereas $1300 received all at once might cause you to pause a moment and decide where best to apply it.
Having said that, we do have our taxes adjusted at source for all RRSP contributions we do through payroll deductions. We still wind up with a refund though since we make additional contributions outside of our work plans. The refunds then usually become the first big contributions to RRSPs for the next year. It rarely sits in the account more than 48hours before it’s gone to our RRSPs, TFSAs or sent as an extra mortgage payment. I know it’s ours, but since that money wasn’t part of our spending plan, I treat it as extra and immediately move it out.
December 5, 2011 at 7:42 am
I looked at the document and unfortunately, I don’t believe I can use it. But what I do take away from Gail’s message is that sometimes we don’t have to “do it hard”. I don’t always have to hunker-down and see my adult responsibilites as a chore. I have options and that includes managing cash flow so I can also have a life.
December 5, 2011 at 9:10 am
I am ok with giving the gov’t an interest free loan. If we get a refund, it gets plunked on something, mortgage probably. I get the idea of having more $ in my pocket earning interest now, but that’s a lot of paper work I don’t want to do, and I am well aware that I am the only one responsible for my $, but I am choosing to let the system stand as it is.
December 5, 2011 at 9:45 am
I admit it — we let the gov’t save the money for us. The refund then goes towards our yearly house taxes. Yes, we could save the money every month….and should….but we’re too lazy????
December 5, 2011 at 10:13 am
With how easy it is to automate your finances, there’s no reason not to do this. Afraid you’re going to spend that “extra” $50 a pay cheque? At the same time you give the letter to your employer, increase your biweekly mortgage payment by $50 or set up an automatic biweekly transfer to your savings account. Done
December 5, 2011 at 10:30 am
Wow great advice – thanks Gail! This will be a great help to me.
December 5, 2011 at 10:34 am
@ Justin, you took the words out of my mouth. Increasing your mortgage payment would probably be the best way to use the “extra” money, saving tons of interest.
People MUST include the extra 50 on their budget, so that the extra 50 on the mortgage is accounted for, and I agree that people should consider the amount of saving on their mortgage, so that they are not “lazy” in saving thousands of dollars.
December 5, 2011 at 10:36 am
what “proof” do you have to send in with your form if you are having your RRSP contribution taken directly directly out of your acct by pre authorized withdrawal??
December 5, 2011 at 10:45 am
It would be nice to actually get a refund …
December 5, 2011 at 10:56 am
I love posts that have to do with taxes! I make a few financial decisions based on tax consequences-Count me in the get-a refund group. If you are in a higher tax bracket, doesn’t it make sense to make a spousal contr. and receive a 32% refund on that $, if you are pretty certain you’ll be in a 25% marginal tax bracket upon retirement? Especially if your income wont be subject to benefit clawback when the time comes. Would love comments or other ideas on this, thanks!!
December 5, 2011 at 10:59 am
I am one that has an extra $10 per week taken off my pay for income taxes. Since my hours fluctuate so much, it oftens bounces me from one tax bracket to the next when it comes to the payroll department. The extra bit helps even it all out in the end.
December 5, 2011 at 10:59 am
Sorry Gail, but I have to agree with some of the previous posters. I don’t really have a problem giving the government an interest free loan. It is nice to get the refund. I could save a little each month and have a dollar or two more than the refund due to interest but I would not have the same …. reward? Incentive? to do my taxes. Knowing that I have money coming makes it easier to take the time to organize and fill out the forms and get everything in as soon as possible. If I wasn’t getting money back (even a little) or if I thought I might have to pay…. I would be filing at midnight before the deadline.
I know that the couple of dollars I am losing really adds up over the whole population. I’m just OK with that.
December 5, 2011 at 11:00 am
Last year, my husband and I ended up paying $100 in taxes… I could not believe our family members that told us we could have the government take more tax off each pay so we would get a refund!
Thanks, but I’m happy not to overpay.
December 5, 2011 at 11:25 am
I have my taxes reduced at source. I have increased my mortgage payment, and my automatic RRSP contribution. Getting that refund is just way too tempting to spend on something big and exciting. The extra RRSP biweekly is great for evening out the maket on my investments.
December 5, 2011 at 11:28 am
Ok people, let’s change the numbers around a little bit…
Do the T1213 for the year 2012 and in January go and increase your mortgage payments by the net amount (marginal tax rate * amount conributed). You will be contributing towards your mortgage sooner in the year so the savings are typically way more than 2%… you are saving the interest of you mortgage (5%!!!) and if you don’t like the profit the banks makes, that will bring it down for them! (Interest-free loan to the gov’t but you are paying that interest to the bank…)
So this can be way more than 2% savings!
December 5, 2011 at 11:31 am
Oh, and I forgot…
If you are paying interest on you credit cards… 11, 20, 29% savings?
December 5, 2011 at 12:11 pm
What refund? I got $105 last year. I make $25,000 a year and work in education (no benefits). I have a university degree, but since I do not own a home or have kids, there are very few refunds I get.
It seems that anyone between 25-30 who do not have a home or kids or left overs from their post-secondary school do not get much of anything. On top of that, last year I had to pay more for a health tax. There goes “free” universal health care in my opinion.
We are a generation that is highly educated and underemployed.
I work hard for everything and recently paid off all my debts.
But what does the government care or do for us to help us when we are still struggling to earn more income. What programs are available to us? Not many.
December 5, 2011 at 12:31 pm
I unfortunately enjoy the check once a year as I am more inclined to save the big one rather than the extra few hundred a month. Small amounts don’t draw my attention but I do know what I am doing when I get that large return…it’s going straight into the high interest account and is sitting there for an emergency!
December 5, 2011 at 12:56 pm
I kind of get why Gail wrote this blog.
Of course I would like a big fat cheque (tax return) to to put towards my TFSA and getting a big lump sum would be easier and probably be more satisfying.
But her point is you STILL get the big fat cheque in the form of SAVINGS with the addition of accumulated interest (interest which YOU get instead of the government) if you have the discipline to save the money instead of spend it.
You maximize your savings potential – in the form of more take home pay, which is what we should all be trying to do.
So when people brag about their spectacular tax refund – you can smile to yourself and know that with added interest YOU got the better deal.
December 5, 2011 at 1:27 pm
I’ve looked at filling out this form before since I get a huge tax refund from business write-offs while I am still employed full time, but I don’t see any space on the form for to put down that that is why I’m requesting lower source deductions.
December 5, 2011 at 2:29 pm
There is the benefit of piece of mind in knowing that if something were to happen you don’t owe money…..
If your income fluctuates alot, I would probably just let it ride… you don’t want to owe the goverment money….
December 5, 2011 at 2:49 pm
The T1213 can also be used if you make a large lump-sum RRSP contribution early in the year. I did that this year. It’s not obvious from the words on the T1213 form, but it works.
December 5, 2011 at 3:31 pm
Gail,
Would you have an advice for new immigrants regarding the Taxes?
If you could write a post on the subject it would be great!
My family and I are in Canada for 3 months now … and I have no clue on how to proceed.
Thank you!
December 5, 2011 at 3:32 pm
We filled out this form years ago to account for our monthly RRSP contributions (to pay less tax each month). This year, we need to change it and increase the RRSP contributions (due to more income). Thanks for the reminder. We usually pay a couple of thousand dollars in income taxes every spring. And we love that we’re getting an interest-free loan from the government all year!
I’m surprised how many people, even after it’s explained, still would prefer to loan money to the gov’t for free instead of the other way around! But thanks, all of you, for basically paying more in taxes (in the form of the interest you could be making on that money–and that the gov’t is making interest on) than you need to.
December 5, 2011 at 7:17 pm
I must admit I am one of the ones that prefers getting the cheque from the government at the end of the tax year.
I even delay putting my tax return in until my bills are due so I don’t get the money and waste it…
S
December 5, 2011 at 9:13 pm
I wish I had reason to look at both sides of the matter and decide what to do. I never have this problem as every year I have to send a cheque for about two thousand extra at tax time. It always amazes me that so many people get considerable refunds and so few have to pay more. Also, it seems that the more taxes you initially have deducted the more likely you are to owe more. The people that pay the least in taxes get the bigger refunds.
December 6, 2011 at 9:22 am
We’re almost eyeball deep in the holiday season and noone mentions Charitable giving? Get your taxes reduced by donating to charities! It can be old stuff you don’t need (as long as it can be used by others) or services you can provide? Or even good old fashion cash. The point is that there are lots of ways to reduce your taxes and make sure you get a healthy refund (just avoid those give $1000 get a $4000 refund schemes!)
Last year, my refund was over 7k. That’s because I put money in my RRSPs and donated a tonne to charities. Our government rewards you for helping others!!
And yes, normally I have the money adjusted early in the year instead of getting a refund, but last year was a new path I embarked on. One that I hope to stay on for a very long time. All the money aside, I LOVE working with the charities and knowing that I am making a huge difference in people’s lives.
If you’re from the GTA or Southwestern Ontario and need a charity to help, try STIMMA (www.stimma.org). They put almost 97% of your donation directly into the hands of the people they help. They have no offices, they have no CEOs, they don’t pay any of their staff.
December 6, 2011 at 7:30 pm
I wish I could do that. But I’m self employed so I ALWAYS pay! My darling husband works 2 jobs and they never take enough off so he pays too… we dread tax time every year.
December 7, 2011 at 3:53 am
I looked at the form too but am not mathmatically inclined and don’t really understand how to figure out how much to ask for – and my payrate is hourly but I get extra for working after 5 PM or if I’m superviser which varies. I know roughly how much my pay is but not exactly every month. I’ve started donating more to charities this year but only some have receipts and the one I donate monthly to won’t send me a receipt until the end of the year.
Guess I’ll see how it goes this year and maybe look at it for next year. With my student loans paid off, I don’t have that deduction so upped my donations to help offset. I usually get a refund but not a big one – a couple hundred dollars if I’m lucky. Will probably be going towards my new brakes for the car in a few months anyway!
December 7, 2011 at 9:05 pm
I must admit that I am part of that group that give the government a “free loan”. I knew about this form and I understand how it works, but, I would much rather get a refund at tax time, than face even the potential prospect of having to owe money.
December 9, 2011 at 4:48 pm
Some people are saying that it is nice to get a little reward when they get their tax refund, unfortunetly people tend to reward themselves by taking the money and buying themselves alittle something extra since the money was like a bonus to them.
Or they rack up a credit card and use the money that was refunded to them from their taxes to pay it off.
I totally agree with not giving the government any more money and do the saving yourself. People need more money discipline.
December 11, 2011 at 2:28 pm
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May 3, 2012 at 8:44 am
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