Not many of us are well versed in tax lingo, so let’s simplify one set of terms that we all should be familiar with – tax deductions and tax credits.
Let’s say your taxable income is $100,000 in 2021 and you owe approximately $30,000 in income tax.
Tax deductions work to decrease your taxable income or that $100,000 that you've earned.
Tax deductions are things like child care expenses, RRSPs, professional association fees and union dues, and charitable donations to name just a few of the more popular ones.
Keep track of your receipts for your expenses during the year and then deduct them from your taxable income when doing your tax return. These deductions may help you reduce your taxable income enough that you slide back to a lower tax bracket which would mean paying less income tax.
Tax credits reduce that $30,000 you owe in income tax.
Both federal and provincial tax credits exist and you'll be glad to hear they help you pay less tax. There are two types: Non-refundable and refundable tax credits.
A non-refundable tax credit reduces the amount of tax payable. To claim a non-refundable tax credit, you must have earned enough income to owe income tax.
Refundable tax credits are paid to anyone who qualifies for them, whether they had income or not. Usually, they're paid out over the year. The most well-known non-refundable tax credit is the GST/HST payment.
A pension adjustment is another tax credit. You get credit for any pension contributions made in the calendar year on your behalf. Your employer will list the Pension Adjustment amount in box 52 on your T4 slip showing your income and income tax deducted for the year.
Knowing some tax terminology is key to making good financial decisions. Our Retirement Information Consultants, who are CERTIFIED FINANCIAL PLANNER® or QUALIFIED ASSOCIATE FINANCIAL PLANNER™ professionals, are here to help with your financial literacy journey. Feel free to contact them with your questions.