“Why should I do tax planning? I already have an accountant doing my tax returns.” I hear these kinds of phrases all the time when working with clients. By-and-large, there is a great deal of misconceptions in the financial services space around tax planning vs. filing taxes.
Your accountant will prepare, record and submit the history of your income for the previous year. They are there to ensure your filings accurately represent actions taken in the past. That is the value of “filing taxes.” A good financial planner will take a forward-looking approach to your financial situation to help optimize your tax position in the future. That is the value of “tax planning.”
When it comes to retirement your income tax situation is incredibly important, making tax planning increasingly valuable. Timing out incomes and deductions can be an incredibly powerful tool in your retirement toolkit. If you don’t plan ahead, you could be faced with:
OAS Clawback: for higher-earning seniors in Canada, you could be missing out on a significant income source. Canadians over the age of 65 are eligible to begin receiving their Old Age Security (OAS) payments each month. If your taxable income exceeds $79,845 in 2021, you’ll start forfeiting some of that benefit, at a rate of $0.15 for each dollar above the threshold. By planning for taxable incomes ahead of time, you may be able to reduce or eliminate the impact of OAS clawback!
Higher Cost of Living: in Manitoba, many programs link your taxable income to the price you pay for that service. Two great examples are assisted living facilities and Pharmacare. Personal care services for Manitobans charge a daily rate, based entirely off your net taxable income as reported on your tax return. Pharmacare, which covers prescription medications, increases the deductible as your net taxable income increases. For retirees who require medical assistance, your taxable income is a very significant factor in your cost of living. Those that are able to access cash, without triggering taxable income, could wind up paying far less for the same level of service!
Tax Bracket Changes: in 2021, the largest jumps in marginal tax rates in Manitoba exist at the $49,020 income mark (from 27.75% to 33.25%) and again at the $98,040 mark (from 37.90% to 43.40%). For individuals with the ability to adjust their taxable income, keeping close to, or under, these thresholds can mean huge tax savings!
These are just a handful of the expensive mistakes that can occur when tax planning is done improperly (or not at all). Taking the time to plan ahead for income tax is crucial.
Tax is one of those areas that, once done, can’t be easily undone. So set yourself up for success in the future by adding some tax planning to your retirement plans.
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