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What would you do with the tax savings of thousands of dollars? Well, that’s what some Canadians are getting in 2022, starting with the Basic Personal Amount (BPA) tax savings. Let’s see how you could save and how that money can work for you.
BPA tax savings of $2,160
Individuals can claim a BPA tax credit. A Canadian can earn the BPA amount without paying federal income tax.
In 2022, EPS is $14,398. Since the lowest federal personal income tax rate is 15%, that means the tax credit is worth almost $2,160! Because this is a non-refundable tax credit, you only gain the maximum tax savings of approximately $2,160 if you would have otherwise paid that much tax in the year. In other words, the tax credit is used to offset the tax payable. Canadians will not get a tax refund on the difference if they pay federal income tax of less than $2,160.
The MPB will increase each year and will reach $15,000 by 2023. Thereafter, it will be indexed to inflation.
Are you maximizing your TFSA?
Good job if you already use a Tax-Free Savings Account (TFSA). A 2020 study interpreted by BMO Financial Group reported that 68% of Canadians have a TFSA. However, “many don’t take full advantage of them, underuse TFSAs and leave money on the table.” And that “on average, Canadians [were] holding $30,921 in their TFSA.
If you have room left in your TFSA, you are not maximizing your tax savings. Every year, eligible Canadians gain more TFSA entitlements. If you have made TFSA withdrawals before, the amount withdrawn is added back to your TFSA contribution room in the following calendar year.
Cash, GICs, bonds, stocks, ETFs and mutual funds can all be held in your TFSA. If you have a long-term investment horizon and can handle the risk, consider investing in stocks or equity ETFs for higher return potential. Online brokerages and the availability of investment information in the age of the Internet make it easier than ever for anyone to invest.
If a TFSA account with a balance of $30,921 gains 7-10% this year in the stock market, that’s a tax-free return of $2,164 to $3,092. If the returns were reinvested in the TFSA, the tax-free fund will snowball to an impressive sum years later, especially if you continue to maximize your TFSA with full contributions each year.
Do you work from home?
Some employees have no choice but to work from home due to the pandemic. You can use the temporary flat rate method to calculate home office expense deductions. Under this method, you can claim $2 for each day you work from home due to the pandemic. You can claim up to $500 in home office expenses this year. This reduces your overall taxable income, resulting in lower income tax paid. The amount of tax savings you get depends on your tax bracket.
With the tax savings you get from these three methods, you can grow your retirement fund to a considerable amount. The idea is to save and invest regularly. Whenever you get additional savings, consider investing the amount. If these methods save you $3,000 each year and you invest and compound the savings annually at 7-10%, you’ll end up with $41,449 to $47,812 in 10 years, $122,986 to $171,825 in 20 years and $283,382 to $493,482 in 30 years.