This is part three of our five-part #TaxWeek series on everything you need to know about filing your return this year. Here's a recap of the entire series.
I hate doing my taxes. Even with my relatively simple tax situation, I don’t look forward to the yearly chore of gathering up forms and wading through government jargon. But the one thing making it worth it? Tax refunds.
Getting a fat cheque back is like an early Christmas, especially when you aren’t making a lot of money. Tax refunds come in handy — they can get your finances on track with an instant emergency fund, a lump sum payment on debts, or something to invest.
How that extra cash is used is up to the individual, but one thing we all have in common is that we could all use more of it. Enter the world of tax breaks.
In case you weren’t aware, tax breaks (otherwise called deductions or credits) are the reason why you get a refund. They are called such because they give you a break (ah?) on the taxes you have to pay (aha!).
The coolest thing about tax breaks is that they aren’t sneaky or bending the law at all. In fact, the government wants you to take advantage of these deductions — but they don’t do a great job of letting you know about what you can deduct.
So I sat down with senior tax professional Valorie Elgar at H&R Block to figure out exactly which tax breaks millennials should get familiar with.
Tax breaks for students/new graduates
Post-secondary education doesn’t come cheap for most of us. According to The Canadian University Survey Consortium, the average Canadian student graduated with $26,819 in debt in 2015. That’s a pretty hefty chunk of change and paying off that debt is often the first step towards financial freedom for Millennials. Luckily these tax breaks can help.
If you moved more than 40 kilometres to be closer to your place of education you can claim some of your moving expenses including things like plane tickets, vehicle expenses, and temporary living expenses (meals, lodging). It even includes incidental costs like having to replace driving licences and legal address changes.
This credit allows you to reduce the income tax you owe by the amount of your eligible tuition fees as well as an amount determined by the government based on how long you were in school. Textbook amounts are not based on the actual costs of your textbooks, but are assumed based on whether you were a part-time or full-time student. Note: the textbook amounts have been eliminated for the 2017 tax year so this is your last chance to claim it!
How to claim it: Your eligible tuition and education amounts will be available on a form provided by your educational institution(s) called the T2202 or T2202A. If you haven’t received it by tax time and you were enrolled in school as a part-time or full-time student in 2016, make sure you contact your school and ask how you can get yours.
Once you get your form, use it to fill out Line 323 on your tax return.
How much cash can it save you? A heck of a lot. Unless you graduate and start earning a high income right away your tuition credits will probably reduce your taxable income by 100% for a couple of years. For perspective, I got a good full-time position almost right after I graduated in 2015. My refund for that year was over $2,000. In 2016 I worked at the same place for the whole year, paying even more tax. That means my 2016 refund is going to be even higher since I still have a ton of credits left from my tuition (pretty much the only good thing about how pricey my education was).
And don’t worry if you didn’t make a lot of money last year. These credits don’t expire, meaning that even if you don’t use them all this year you can carry them forward to your next return.
This is more for graduates who've begun paying off any student loans they have. If you got your loan from the government (national, provincial, or territorial student loans) you can claim the interest you paid on your student loans that year. It might not be a lot, but that’s a little less student debt than you had before right?
Tax breaks for single, young working professionals
Once you’ve entered the workforce and exhausted your tuition credits there aren’t many tax breaks to take advantage of as a single person with no dependants. That’s alright though, because you’re a young, single person with no dependants. During these years it’s expected you will be able to earn enough money to support yourself well without the need for tax breaks. There are, however, some basic breaks that apply to everyone that you can take advantage of.
For the 2016 tax year, everyone gets a tax credit on $1,161 of their income, unless they report making less income than that, in which case they get a tax credit on that amount.
RRSPs and group RRSPs are the most common way to take advantage of taxes. While many millennials are in the lowest income tax bracket, an RRSP is good for those who find themselves falling into a higher tax bracket. Elgar doesn’t recommend RRSPs for those in first tax bracket, or even sometimes the second.
Read more about taking advantage of an RRSP in our chat with Joe “the Investor” Barbieri earlier this week.
If your job requires you to be part of a union, or professional board or such similar organization, you can claim the amount you paid in regular membership dues.
Tax breaks for those with side hustles
When you work for yourself, the world of tax deductions gets much more comprehensive. Running a business is no easy task. It requires lots of time, energy, and of course, money. Luckily, the government appreciates entrepreneurs, and allow them to use tax breaks to cut down expenses.
When you have self employed income, you’ll have to file a business tax return, as well as your personal one. You (and your spouse, if you have one) get a little longer before you have to file: June 15 this year, instead of May 1 for everyone else.
Businesses can claim more or less all of their expenses as long as it’s entirely a business expense. That means equipment, rent, gas, salaries, insurance, and more can all be claimed on your return.
You can claim the square footage of your [home] office off your mortgage or rent, plus utilities
Elgar of H&R Block gives us this example: “If you work from home selling life insurance and you have a dedicated office, you can claim the square footage of your office off your mortgage or rent, plus utilities, and claim it as a business expense. Also, you can track the mileage you drive for business purposes, and claim that percentage of your total gas, insurance, and maintenance costs.”
For a good list of operating expenses to consider, check out the government’s page on the matter.
Elgar told me the most important thing for millennials running their own business is to “keep track of every expense and your income for the entire time.”
She said one of the biggest mistakes she sees millennials making is a lack of good record-keeping.
Pro-tip from Valorie for self-employed millennials
When you have an employer, they will automatically pay your CPP contribution for you. If you’re self-employed, you have to pay the full CPP amount of up to 9.9% on income between $3500 and $54900 when you file your taxes. “So if you make $25,000 at your main job and $10,000 on the side, you’re paying the applicable taxes on those incomes plus the CPP amount of up to 9.9% on the $10,000.”
The lightning round
Had enough yet? There are so many ways to save on taxes that it’s easy to see why professionals make big bucks doing them for people. Don’t worry though, we’re almost done. Let’s fly through these last ones.
Tax breaks for couples
The CRA considers couples common law after one year, and then you are treated as a married couple. We talked all about this the other day with Desirae Odjick of Half Banked.
One interesting thing we didn’t mention before though: if one spouse doesn’t work, or makes less than the Basic Personal Amount (for 2016 that’s $11,474), their tax credits transfer to the higher income partner, including student credits. This could be a huge help if one spouse is working, while the other studies or raises children.
Tax breaks for people with kids
Canada child benefit. If a family’s income is under a certain threshold, they will receive a monthly benefit from the government to help with the cost of raising their children. There is a maximum of $6,400 for kids under the age of 6 and $5,400 for kids aged 6-17.
Additionally, there is a child disability benefit if you care for a child under the age of 18 with an eligible disability.
Claim the Children’s fitness tax credit if a child does athletics (sports lessons, swimming) or the Children’s arts tax credit such as painting lessons, tutoring (Kumon, for example). These credits have a maximum eligible fee of $500 and $250, respectively, making the maximum credits $75 and $37.50 each. If your child is also eligible for the disability tax credit, however, these amounts go up to $150 and $112.50.
So go do your taxes
Tax breaks are a doozy. We only mentioned some of them here, but there are dozens more out there. It can feel overwhelming at first, but the system is actually designed to help guide you.
If you have only one or two tax forms and are technologically savvy, it’s simple enough to use tax software to file your return for free. Paid software from H&R Block or TurboTax will offer tax return guidance for those that need a bit of help. H&R Block offers free consultation as well. You only need to pay if they file for you, so don’t be afraid to go in and ask questions if you need to.
You have until May 1 to file your 2016 tax return — but the sooner you get them out of the way, the sooner you can say hello to that refund.