Financial New Year’s Resolutions

Personal Tax Changes to be Aware of for 2014

As we approach April, we approach the season for filing our individual tax returns.   To assist those who want to be update to date on the latest and greatest changes impacting our personal tax regime, I’ve summarized below What’s New in the world of Personal Tax:

Family Tax Cut – Up to $2,000 per Year in Savings

The October 30, 2014 Federal Budget introduced the Family Tax Cut, a new non-refundable tax credit up to a maximum of $2,000 for eligible couples with minor children (under the age of 18 at the end of the tax year you are filing).  The measure is based on the concept of income splitting, permitting a higher income spouse to pretend that that they have allocated up to $50,000 of their income to their lower income spouse.

1.       As we are fresh off of the Christmas season, consider circling back to your family or friends and establish rules for future gift exchanges.  Set limits on gift amounts, either by $ amount per gift or by using a name draw that reduces your gift buying to one or two gifts versus a greater number.   Another alternative is to combine a smaller gift with cash that this intended to go to the recipient’s RESP.

2.       While I mention RESPs, the goal is to have a maximum of $2,500 per year going into RESPs for children under the age of 17.  Generally, the contribution is eligible to a 20% grant, which annually is subject to a maximum of $500.  So our RESP can go up at least $3,000 annually if we contribute $2,500 and the government grant of $500 is contributed.    $2,500 per year is approximately $200 per month.  If that is too much on your budget, pick a monthly amount to start ($50, $100, ???).   Anything is better than nothing, and monthly payments are easier goals to manage than annual lump-sum contributions.  Need some more information on RESPs? See my blog on RESPs at  http://www.mgfadvisory.ca/RESP-child-education-planning.html

3.       Allocate an extra $100 per month on your home mortgage.  Almost all fixed mortgages have an ability to pay up to 10% extra per year on the mortgage without any penalties.   Pick a small amount per month (it can be even less than $100) and start paying extra on that mortgage.  After a few months you might find that you do not even miss the extra cash.   If cash flows get tight, reduce the extra payment for a while.  Those little payments can add up quickly.  Need further motivation to pay off that mortgage early?  My blog on RRSP vs Debt offers some further insights:  http://www.mgfadvisory.ca/rrsp-vs-debt.html

4.       The cost of living is always a moving target.  For the 2015 year we know that certain costs are going up (BC Hydro, MSP premiums) and that certain costs are going down (no more Aircare, cost of oil/gas).   Consider starting the year with a cash flow exercise which tracks how much money per month you are making, and roughly where that monthly amount is being spent.  On the expenses, start with those that are easier to identify (property taxes, cable/phone/internet, mortgage payment) and then use some estimates to fill in the other typical spending areas (food, vacation (per month), dining out and entertainment).   A cash flow estimate is a very important tool in financial planning, even if it is done with some estimates.  It sets the table for putting spending on discretionary items on the table so that if necessary you can budget over-spending, and allows you to slowly work in those extra financial objectives (such as extra payments on your mortgage or RESP).

5.       Budget your worst offender in terms of monthly or annual expense!   If you had to admit what was your expenditure that you make that is discretional (not a fixed cost around food, clothing or shelter), what would it be?  Vacation?  Coffee shop visits daily?   Smokes or alcohol?   Pick a category (only one) and set a monthly budget on that item only.   Do not use the “crash diet” approach which is to remove all spending on the item, as we generally will rebel against that drastic of a change and go right back to what we were doing before.  Instead, I would advise to reduce the estimated monthly spending by 10% for a 3 month period.   Once that is accomplished, try to reduce the spending by another 10%.  Over a period of time, you will find the category is not as much of a concern, and you have freed up some monthly cash flow for other financial objectives.

6.       Rebalance of your investments/RRSPs.   The markets were generally happy again for 2014.  North American markets generally outperformed International markets, and the US markets were more stable than Canadian.   Based on these movement, your portfolio may look a little different in composition than it did the last time you and your advisor spent some time reviewing your asset allocation.   Now is as good a time as every to assess whether to rebalance your investment mix.   Check out my blog on the topic of RRSP rebalance from 2014:  http://www.mgfadvisory.ca/rrsp-rebalance.html

7.       Are you someone who has all of your life insurance needs covered through your employment benefits?  If so, you might be able to save significant money per month by assessing your own individual life insurance policy in lieu of optional group life insurance.    That is because individual life insurance is underwritten based on your current health, and if you have health that pricing can be quite attractive.  The pricing of group optional insurance is not based solely on your health but on the health and age composition of your employee group.   The older the employee group, the higher the costs of the optional life insurance.   I have seen quite a bit of success in pricing much more affordable life insurance solutions under individual policies that are intended to replace optional group life insurance.   Need to read more on this topic?  Check out:
http://www.mgfadvisory.ca/Optional%20Group%20Insurance%20versus%20Individual%20Insurance.html

8.       Are you tax efficient?   By this I mean have you assessed and taken steps to be paying as little taxes as possible on your savings and investments.   For example, do you have extra savings in the form of GICs or interest term deposits?  If so, are they in a registered account (RRSP or TFSA (Tax Free Savings Account)) where they can be earned tax-deferred (RRSP) or tax-free (TFSA).   If not, you are likely paying annual taxes on your interest income when you don’t need to.    Tax efficiency can be a little complicated, so if you need to get a professional with experience to review your personal holdings and offer you some advice, do it.  It is well worth it in the long-run.

These are just a few ideas, with many more available to us.   You can skim over my Blogs at http://www.mgfadvisory.ca/blog.html to see if any other ideas spring to mind.   Also, contact me at marco@mgfadvisory.ca if you have any questions, need some help or wish to offer up any of your favorite financial New Year Resolutions!

Need help?  Call me at 604-789-3888.