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Get on the Right Path With Your Tax Prepayments

The next important tax filing milestone is coming up: it's June 15. That's the date when your next quarterly instalment is due, required to prepay your tax on income for 2010. It is also the filing due date for taxpayers who operate unincorporated small businesses. Coincidently, those folks often are required to make instalment payments, which can make mid June a very expensive month.

It's important to note that if your income will drop in 2010, you should change your quarterly instalment remittance method. Many people miss this opportunity, submitting instead to the CRA billing method. But it really is a shame to pull money out of the marketplace, perhaps at just the wrong time, to make an over-inflated instalment payment at this time of the year.

Instead, you can switch your method of paying instalments, estimating your income for 2010 or basing your instalments on last year's income only; however, know that if you are wrong, and you end up owe money when you file your 2010 return next spring, you'll pay some interest on the differential.

Managing your cash flow to minimize tax overpayments, whether by instalment or through tax withholdings at work, is just plain smart. Remember you are only required to pay the correct amount of tax, not a dime more. The rest of the money you keep for yourself is "milk money", or certainly money that can be used to pay down bad debt, like credit card debt, or park in a tax-wise investment like an RRSP or TFSA.

So, check out the following principles for getting your tax prepayments right, all year long:

  1. File form TD1 Tax Credit Return (federal and provincial) with your employer to indicate with precision your available non-refundable tax credits this year, based on your personal and family circumstances. Get the benefit of your tax refund every two weeks, and invest into the marketplace all year long.

  2. File form T1213 Request to Reduce Tax Deductions at Source if you make RRSP contributions or have lots of medical, charity or other tax reducers during the year

  3. Review the income basis for your quarterly instalments if you don't have enough tax deducted through your employment to account for other taxable income sources earned in the year. Estimate the taxes due this year if your income will drop.

  4. If you will experience an increase your tax deductions or non-refundable tax credits, for example, RRSP contributions, child care, employment expenses, disability, medical or charitable donations, it will make a difference to your taxes payable, in a good way. Be sure to account for this to reduce your tax withholdings or quarterly instalments.

  5. Bonus: there could be gold in prior filed returns. Recover overpaid taxes of prior years by filing a T1ADJ form, if you find you missed claiming an important deduction or credit on your tax returns. Then invest this bonus wisely.

Remember, tax literacy is important, all year long, not just during tax season. When you manage your taxes, you manage your cash flow, and that provides you with lots of opportunity to manage your future wealth.


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