When financial planning - taxes become a very important piece of the puzzle in many different times in our lives. It is often best to start with the basics before we can go in to strategizing. This way, if everyone understands how things work, it makes it much easier to have a conversation around coming up with a solution.
What is a tax deduction?
Quite simply a tax deduction (or write off) reduces your income for tax purposes proportionate to the amount of the deduction.
For example – If someone made $50,000 of income and they had $10,000 of tax deductions, when they go to calculate their tax bill at the end of the year they will only need to pay taxes on $40,000.
(Original Income = $50,000 (-) $10,000 deductions = $40,000 taxable income)
Some examples of tax deductions are as follows;
- RRSP Contribution (Up to your limits)
- Child Care Expenses (Within limits)
- For a business for self individual – Business expenses
- Moving Expenses (Within limits)
- Interest expenses on a loan used for investment purposes
Many people have their taxes taken off directly from their pay cheques. In this case…If you have several tax deductions, the end result is that when you submit your tax return you will receive a refund from the government.
Essentially they are saying “Sorry we overcharged you for taxes this year…here is your money back”
Click here for a simple calculator you can use to see the effect of a tax deduction. Simply change the income level on the top and you will see what your income taxes will be at different income levels.
(Use the example above. The difference between taxes payable will be the refund amount)
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