HOW TO GIVE YOURSELF A RAISE IN 2010 Part1: A Tax Refund is a Bad Thing

In my experience, the key to building sustainable wealth for every taxpayer subject to source deductions, is the degree of success one has in incorporating tax planning with year round financial decision-making. The issue boils down to three things: take control of the first dollar earned, keep it the longest, and then plan transition the most to the next generation.

To take control of the first dollar earned is easier for the self employed.  They pay taxes on the dollars left after the costs of earning revenues are deducted. Then quarterly tax instalments are remitted (the 15th of March, June, September and December); or in the case of farmers, once a year on December 31.

Instalment tax payments are required when net taxes owing at tax filing time exceeds $3000 in the current year or either of the immediately preceding two tax years. Therefore many seniors or even divorcees receiving spousal allowances can be required to make instalment payments. For those taxpayers, an accurate estimation of the current year’s taxes payable will result in a reduction of the final two payments of the year.

For the employed, however, the key is to minimize taxes required to be withheld by their employer at source.  With the average tax refund being in the vicinity of over $1400 per year (or close to $120 a month), the benefits of vigilance over required source deductions are exponential.

If you understand the time value of money—it’s worth more in your hands today because of its potential to earn money for the future–you will be poised to make better financial decisions all year long because you get to work with more money, first, and use it longer to accumulate and grow your savings. You will accumulate more wealth, faster, especially if you invest in a tax preferred vehicle such as a TFSA or RRSP.

However, Canadians are notoriously complacent about their source deductions, preferring to receive that “windfall” tax refund when they file their return. But, remember, providing an interest free loan to the government at the expense of compounding investment growth is not smart, for the reasons mentioned above. 
Worse, most taxpayers forget that income taxes paid are the largest revenue line item for government, and will be your largest lifetime expense for two reasons:  they erode income earned along the way, and they will erode accumulated capital too, at actual disposition or at death, in the absence of determined tax planning.

In short, your purchasing power is reduced both now and later, when you give up control of your precious hard earned, pre-tax dollars.

Next Time: The Good News!  How to keep more of every first dollar earned starting January 1, 2010.

Evelyn Jacks is President of The Knowledge Bureau and the author of three new books available now from www.knowledgebureau.com: Essential Tax Facts 2010, Master Your Taxes and Make Sure It’s Deductible.

Link to Bio: http://www.knowledgebureau.com/Faculty.asp?tab=Meet&ID=1



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