3 Key Steps to Follow When Planning Your Taxes

Tax planning is the analysis of an individual or a corporation’s financial position to ensure tax efficiency. Tax planning helps people and businesses utilize tax breaks and reduce their tax liabilities legitimately and efficiently.
However, tax rules can be complicated and require time to understand, which means that if you’re a beginner, you need to be very careful when planning your taxes.
Here are some key steps you should follow to ensure you develop a concrete tax strategy.

Step #1: Identify Your Tax Bracket

To plan your taxes, you first need to understand which income bracket you fall into. The Canadian tax system is based on your taxable income, so the higher your income, the higher tax rates you’ll be subjected to.
Even if you fall into a particular income bracket, you won’t pay the tax rate on your full income. This is because you can subtract tax deductions from your taxable income. Hence, your taxable income is usually not equal to your salary or your total income.

Step #2: Understand the Difference Between Tax Deductions and Tax Credits

When you’re preparing for your tax returns, you need to understand tax deductions and tax credits to reduce your tax bill.
Tax deductions are particular expenses that you can subtract from your taxable income. They help reduce the amount of income that’s subjected to taxes.
Tax credits are a dollar-for-dollar reduction in your tax bill. For example, if your tax credit is valued at $500, your tax bill will also be reduced by $500.

A man noting down his expenses as part of tax planning

Step #3: Decide Whether to Itemize or Take the Standard Deduction

The standard deduction is a flat dollar tax deduction, which significantly helps with tax preparations. Taxpayers prefer to take a standard deduction so they can quickly prepare and file their tax returns.
The standard deduction that you’re eligible for depends on whether you file as a single tax filer, married, head of household, etc. The amount of standard deduction also changes every year based on inflation.
Itemizing your tax returns means taking all individual tax deductions that you’re eligible for. A good reason to itemize your tax deductions is if the total is more than the standard deduction.
To itemize your tax deductions, you need to keep track of them throughout the year and prove that you qualify for these deductions.
Tax planning is a complicated process; consider hiring professional accountants who can guide you and help you build an effective tax strategy. Faber LLP has professional chartered accountants with over 20 years of experience in tax planning and tax advisory. Contact us here to benefit from our accounting services in Edmonton, Alberta.