How Covid-19 might have adversely affected your 2020 tax return and some possible steps to lessen the impact.
I think most of us are glad to be looking at the year 2020 through the rear-view mirror. Am I right? But before we move on entirely, we should probably file those tax returns. I know... I know. That doesn’t sound very fun. Especially with many of us expecting a larger than usual tax bill this year.
Despite job losses resulting in reduced income in 2020, why are many Canadians facing a bigger tax bill than ever before?
Here are some reasons you may find yourself in this situation and suggestions that might help you lower your tax bill.
Not Enough Tax Withheld at Source
Remember those forms you signed when you were hired? The TD1, personal tax credits return form, tells your employer how much tax to withhold from your earnings dependent on your personal situation. Your employer then deducts these amounts, along with EI premiums and CPP contributions, and remits those to the CRA on your behalf throughout the year.
However, last year, many Canadians received taxable Covid-19 benefits which had little or no tax withheld. Because these amounts must be included in income and did not have enough tax withheld at source, your tax liability increases. This means you may owe more at tax time even though your total income may have declined.
NOTE: Any non-taxable benefits you may have received such as the GST/HST credit, OAS/GIS payment, disabilities or extra CCB Canada Child Benefit do not get added to your income.
Payroll Deductions for RRSP’s
For those employees who contribute to their RRSP’s through payroll, lower contributions mean less of a deduction at tax time. For those lucky enough to maximize RRSP contributions every year, lower earnings in 2020 also affects RRSP contribution room for 2021. This will need to be considered especially when estimating how much to contribute in the first 60 days of 2021.
Decreased Expenses
Decreased spending means greater savings, right? While spending less is usually a good thing, it does affect the amounts you typically claim on your taxes. With facilities shutting down last year, expenses were reduced for things such as childcare, medical procedures and services and travel for work. If you had less of these expenses you will have less deductions.
To sum up, even though a person’s total income may have fallen in 2020, not enough tax withheld along with reduced tax deductions and credits could result in a potential tax bill.
What can be done?
Here are some strategies to consider.
Review Any Carry Forward Amounts.
What are carry forward amounts?
These are certain tax credits and deductions that haven’t been used up in a prior year that you can carry forward to another year. If you have any of these amounts available, you may apply them to your taxes this year to reduce the amount owing.
Where do you find these amounts?
This information can be found on your notice of assessment (NOA) or on CRA’s My Account if you have signed up for this service.
Some examples are:
Tuition and Education Amounts
Moving Expenses
Charitable Donations
Student Loan Interest
Contribute to Your RRSP
This is a bit tricky right now as individuals' spending habits have changed due to Covid-19. Not everyone feels comfortable about not having access to disposable income. If you do have any RRSP carry forward amounts, you could use these.
If you do decide to contribute, there is still time to purchase RRSP’s until March 1, 2021.
Home Office Expenses for Employees
If you worked from home during Covid-19 don’t forget you may be eligible to claim Home Office Expenses on your personal tax return. To determine eligibility and how to claim these, check out my other blog here.
As always, it is important to maintain good records, information and documentation for taxes in the event of a review. These include T-slips, receipts for tax credits and deductions and related records to prove CERB eligibility if you received any benefits.
How do I figure out NOW if I’m going to owe taxes this year?
First gather your pay stubs and bank account deposits. From these you can estimate your income and what you have paid in income tax.
Use an online calculator to estimate taxes due and use strategies above to reduce your bill as needed.
Tax Tips has a great free online tax calculator here.
Looking for assistance completing your T1 tax returns this year? Request a quote from Airdrie Tax Services.
Cheers,
Cindy