THE TOP 10 TAX MISTAKES

I signed on to play a couple of mindless games this evening and came across the following email piece by Gordon Powers on MSN Money, April-26-12. So I thought it was appropriate given that the deadline is fast approaching.

Whether you do your own taxes by hand or using software, you want to pay your fair share and not a dollar more.

Taxpayers can miss out on legitimate writeoffs either by leaving things to the last minute or simply not staying abreast of the current rules. Read on for some of the biggest slip-ups you might be making.

TAX MISTAKE 1: NOT FILING TO BEGIN WITH

Even if you don't owe the Canada Revenue Agency any money, file a tax return anyway. You may still qualify for tax credits and deductions that aren't only driven by income.

For instance, anyone who earns any amount of employment income qualifies for the Canada Employment Credit.

As well, students 19 and older can apply for the GST/HST credit — a tax-free quarterly payment that assists low-income earners in offsetting the consumption taxes they face in their day-to-day lives.

To receive this credit, however, you have to apply for it each year by filing a return — even if you have little or no income to report.

Similarly, the Guaranteed Income Supplement paid to seniors is based on your previous year's income, or the combined annual income of both you and your spouse or partner. You must re-qualify each year to receive the GIS and filing a return is the most efficient way to do that.

TAX MISTAKE 2: NOT USING TAX PREPARATION SOFTWARE

If you're a do-it-yourselfer when it comes to taxes, there's little point in going it completely alone. If you feel you don't need the services of an accountant (and most people don't) and don't really like the idea of waiting beside a mall kiosk, at least explore commercial tax prep software.

The cost can be as low as $20 to produce an online return and most programs include extensive planning and prompting features so you can analyze different income tax scenarios.

Afterwards, filing your taxes online through the government's NETFILE service as opposed to sending it by mail is faster and pretty much hassle-free.

As well, chances are using just about any program will drastically reduce the odds of committing virtually any of the mistakes listed here.

TAX MISTAKE 3: FILING AS INDIVIDUALS RATHER THAN AS A FAMILY

Unless you're single, you should make sure that you view your tax plan in the context of the entire family. Why? Because there are several deductions and credits that can be transferred between family members.

For example, if your child is in university but doesn't need his or her education and tuition credits, you can use them instead. At the other end of the spectrum, the same goes for the credits related to age and pension amounts.

Start by looking at the lowest income earner's return and work your way up to the higher earner to get a clearer picture.

TAX MISTAKE 4: OVERLOOKING ALL THOSE OTHER TAX CREDITS

While this may not be much of an issue if you're hiring someone to prepare your return, make sure you actually understand the detailed rules. And, if you're a couple, be sure you have a family conference to compare notes well before the April 30 deadline.
With a little research, couples can often unearth deductions and tax credits for everything from public transit, child care, and moving costs to charity, home upgrades that boost energy efficiency and business expenses.

The extra challenge for some couples is keeping close track of all the paperwork throughout the year. Even if someone else is doing the paperwork, get organized. This way, tracking down records when filing for credits doesn't lead to a paperwork disaster.

TAX MISTAKE 5: FORGETTING TO BALANCE CAPITAL GAINS WITH LOSSES

If you're like most investors, you've probably got some disappointing losses from things that didn't work out as planned. Don't forget that capital losses can be carried back to offset capital gains of prior years.

The catch is that the current year's capital losses must first be applied to this year's capital gains before being carried back to a maximum of three years. So, 2011 losses would first be applied to 2011 capital gains before being carried back to offset gains in the years 2008 through 2010.

This is the last year that capital losses can offset capital gains from 2008, in other words.

TAX MISTAKE 6: NOT ANALYZING YOUR PAYCHEQUE

If you're lucky enough to have one, you're probably footing at least a portion of the premiums for that healthcare coverage at work. Not sure? Well, have a look at your 2011 paycheque and see if the cost is hidden among all those payroll deductions.

Most people forget to include this cost in their medical expenses at the end of the year, because it shows up on their pay stub, not on their T4 slip.

Only the expenses in excess of three per cent of net income can be claimed, however, although you're allowed to include out-of-pocket expenses not covered by your plan as well as healthcare insurance when you travel.

TAX MISTAKE 7: DEDUCTING YOUR RRSP CONTRIBUTIONS EACH AND EVERY YEAR

If you're pretty sure your income will rise, consider making an RRSP contribution but save the tax receipt for later.

There's nothing to say that you have to deduct that contribution right away. In fact, waiting awhile can mean quite a difference in your after-tax income.

This buy-now-deduct-later strategy will work for anyone whose income fluctuates dramatically from year to year or who expects to see a big jump in their paycheque once they finish their professional training.

TAX MISTAKE 8: IGNORING PENSION INCOME-SPLITTING STRATEGIES

Ottawa's decision to permit the splitting of pension income was a huge tax break for couples, although some singles believe they are being discriminated against.

In case you missed it, older Canadians can now split up to half of their pension income with their partners, evening out family income and reducing the tax bite at the same time.

The type of income that qualifies for splitting is different if you're under or over 65 years of age and OAS payments don't qualify.
The savings here will vary sharply depending on family income, meaning the optimal balancing factor — you don't have to split pension income equally — could change from year to year. Even though this split doesn't require the physical transfer of funds, both of you must make a joint election using Form T1032.

TAX MISTAKE 9: NOT KEEPING A COPY OF YOUR RETURN

You probably have a several boxes full of papers you never look at. When it comes time to culling them though, make sure your previous tax returns don't go out in the trash.

Generally, you should keep your supporting documents for at least six years, particularly if you're self employed. Have the receipts and documentation to support your claims ready in case you're selected for review.

Your previous tax returns can also help you track trends in your financial life and to prepare future returns. They're also a handy reference if you think there are deductions you may have missed.
If you find you've made a mistake in the past, you can file an adjustment request and possibly receive a larger refund for that amended year.

TAX MISTAKE 10: ASKING FOR AN EXTENSION

Sorry, you're not in school any more. Although you can actually apply for an extension in the United States, there's no such option here in Canada. Miss the April 30 (June 15 if you're self-employed) and you'll simply be filing late.

The penalty for late filing is five per cent of your 2011 balance owing plus one per cent of your ongoing balance for each full month that your return is late. So, filing on time will save you a lot of money.

If you're short, pay as much as you can on time and then set up alternative arrangements with the CRA for the rest of the money. Don't expect too much sympathy, however. The government expects you to arrange your financial affairs yourself, not look to it as the default lender.

So with the above article, remember "It is okay to pay tax, just do not give the government a tip"

Cheers