File as a Family to Save on Income Tax

You can save thousands of dollars by filing all your family's income tax returns together. If you file as a family, you can transfer deductions and credits amongst family members, split income for better after-tax results and even make better investment decisions.

So, start with the lowest-income earner, then work your way up to the highest-income earner. Keep an eye on net income levels and sources of income.

 Does each eligible family member contribute to his or her RRSP and Tax-Free Savings Account? Do you know who in your family qualifies for each? Do you know how much contribution room is available? 

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Over the last few years I’ve been freely dispensing financial advice.  In the present article I’ll summarize my recommendations.  These are conservative tips that would be appropriate in any setting, but are particularly important given my dire views on the Western economies.

Save More
It’s common knowledge that if a person has the wisdom and discipline to save for the future, then he or she can eventually enjoy a permanently higher standard of living.  As Albert Einstein reputedly remarked, the most powerful force in the universe is compound interest.Incidentally, people shouldn’t feel guilty about saving more, notwithstanding the handwringing coming from mainstream economists. Everybody can increase his or her standard of living through saving. In other words, it’s not the case that if Alice makes a better future for herself by saving a higher fraction of her income, then there must be some Bruce out there who is going deeper into debt. Society really can save and invest “on net”, in the sense that everybody can obtain claims to a growing stockpile of capital goods that make workers more productive. If households and firms save more, they will actually speed the general economic recovery.

Develop Multiple Streams of Income
When people hear the advice to save more, they typically think that they need to stop spending. Although one obvious way to save more each month is to reduce frivolous expenditures, that’s not the main thing I have in mind. If a person really wants to start socking away a lot more each month, the best avenue is to boost income, not cut spending. There’s no limit on how much (in principle) someone can earn.Don’t misunderstand me. By all means keep your expenditures sensible. Having huge payments and over the top living expenses on a modest income doesn’t work. Yet even after looking at your expenses and cutting out the stuff that you really don’t need, everybody — should start brainstorming about how to bring in more income. Notice here that I don’t simply mean someone who currently works in an office should consider working nights as a waitress. In fact, that’s not primarily what I have in mind. Instead, I think  people should consider a host of entrepreneurial ventures. Rather than looking for other bosses, people should become their own bosses, at least in a few limited areas. Self employment opens up a bunch of ways you can save on the income taxes you pay on your self employed income.
To some people this suggestion may sound intimidating, but you can find customers (usually through word-of-mouth) and provide a service  for which you get directly paid.  Look for a service which people need  or want. When I am not doing financial planning or taxes. I like boating and have a certification as a skipper. People will pay me to help them learn how to handle their boat and to get a Pleasure Craft Operator certification. This certification is required by law in Canada, so everyone who has a boat needs to get it. Think about any skills or hobbies you have and how you can earn some extra income from something you like to do.
I’m not saying a person needs to brainstorm until finding “it,” the fantastic idea that will eventually make someone rich. It’s worthwhile doing all sorts of different ventures, so long as each one is self-contained and doesn’t threaten to absorb too much time. It may take a lot of trial and error to gain the skills, confidence, and knowledge of customer demand before finding something really profitable.As with all of my recommendations in this article, generating multiple sources of income is always a wise thing. However, in the present environment it is critical. Even someone who currently has a “good, steady job” can’t be sure of his position even a year from now. It’s much better to get a fledgling business established now, during the weekends or other days off, so that the owner will already have a solid base of customers when the economy slumps again.To reiterate, my advice is not to try to save more by looking at the monthly budget and saying, “Well, this is how much I make, and so if I cut back here, here, and here, then I can afford to put aside $250 more per month.” No, I would much rather a person say, “If I cut back here, I can free up another $100 per month. And if I cleaned three houses every Saturday, then after expenses and treating myself to a nice dinner every weekend, I could save an additional $600 per month.”

Build Up at Least a Month’s Worth of Expenses in Cash.
Now if a person is saving more each month, the obvious question is: How should those savings be used?  The point of doing this is to get out of the habit of living paycheck to paycheck. Such a lifestyle is bad for (at least) three reasons: Most obvious, it leaves a person vulnerable to even a minor setback. If there is an unexpected expense, or if the person gets laid off, then obviously a small cushion of cash would be crucial.Yet beyond this obvious justification, there are two other reasons that building up at least a one-month window of cash balances is a vital, immediate step. First, it frees up more time, especially for a person who has followed the earlier steps and is now earning income from several sources. Rather than having to run to the bank every time a new check comes in the mail, and rather than having to go online and check the bank balance every other day to make sure nothing is going to bounce, a person with at least a one-month cushion can better afford to let the paychecks and bills accumulate, then deal with them in one fell swoop. This allows for the person to spend more time focusing on the business(es), rather than stressing out about cash flow.The other main reason the paycheck-to-paycheck mentality is destructive for the entrepreneurial person, is that the person is more prone to goof off whenever he’s done enough to “get through the month.” But once that critical threshold has been extended past the one-month barrier, there is little difference between having enough to pay for one month versus two or three months. Once a person takes it for granted that he will have money left in his checking account even after paying all his bills for the month, that surplus will mysteriously begin to drift upwards with each passing month.

Eliminate Variable-Rate Debt as Quickly as Possible
.If a person already has a decent amount of cash on hand, I think the next goal should be to eliminate variable-rate debt as quickly as possible. The most obvious example is credit-card debt Note that “eliminating” variable-rate debt doesn’t have to mean paying off the balances. Using a new balance-transfer promotional offer, for example, might allow a person to lock in a fixed rate for a year or more. Taking an RRSP loan at prime plus 1% and using the resulting income tax you get back from the government to pay down credit card debt is one method that converts credit card debt at 19% to debt at prime plus 1%In closing, I want to stress that I am by no means a role model in this arena. I can write with confidence on the above matters precisely because I have seen firsthand what happens when you don’t follow these ideas. 
Experience is a great teacher, so take advantage of someone who has been there.

Contact us anytime for further information on saving taxes and financial planning ideas.

When it comes to getting the best return for money, it is important to file all family returns together, and get to understand them too, by keeping an eye on income levels and sources. This will help you make better investment decisions...like when to contribute to RRSPs and the Tax Free Savings Accounts-and get more cash back from tax credits and social benefits.

If you are working with a professional advisor, enlist their help before year end. There are three simple steps you'll want to know more about:


1. Review each return separately and make sure it's prepared to the individual's best tax benefit, starting with the lowest income earner and working you way up the the highest.


2. Now look at the results on each return from a family, rather than individual, viewpoint. Did you claim all transferrable deductions and remember to split family income?


3. Now tweak your tax and financial plans, to make the best investiment decisions for the family unit as a whole.