If you read this post’s headline, you must be thinking that I am either egotistic or a great income tax strategist. Admittedly, I do have a bit of an ego as I believe that I’ve developed a great income tax strategy to help me pay less income taxes.
In this post, I’ll be sharing a tale of two spouses with two different income tax strategies. On one hand, you have one spouse (me) executing the simple income tax strategy that helped him save more money and receive a sizeable tax refund every year. On the other, you have the other spouse (my wife) who has no income tax strategy or planning at all. The result will surprise you. I guarantee it.
My Background
For the avid iSaved5K readers, you’ll definitely know that I love to DIY everything. If I can save a couple of pennies, no matter if it’s changing the toilet or building a deck or filing my income taxes or managing my finances, I’ll do it. The scary part is that I actually enjoy it too. I love to read about personal finance and learn as much as I can to improve and keep myself in tip-top financial shape.
My Spouse’s Background
My wife has a very different mindset than me when it comes to money. She’s not the type that has a strong interest in personal finance or money. She prefers to be hands off when it comes to our family finances, which works out well for me. However, she is a great deal seeker when it comes to shopping for the family. She’s also very receptive of my money-saving ideas (I often present her with the ideas before I execute them).
How To Pay Less Income Taxes?
Benjamin Franklin once wrote, “In this world, nothing can be said to be certain, except death and taxes.” I have absolutely no doubt about it, but it doesn’t mean that I can’t try to pay less income taxes. For starters, I don’t think that you have to be a tax accountant or a tax lawyer. All you need is the passion and discipline to save money. I will demonstrate that it really does pay to be a diligent saver.
Sources Of Income
Since my wife is not that into personal finance, she only has three sources of income (employment, rental and child benefit payment from the government). She also has other passive income sources like her Tax Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). For the purpose of taxable income, only the three non-passive sources of income counts. All three sources of her income are quite tax inefficient as there are no tax breaks for those incomes.
On the other hand, my passion for personal finance leads me to continuously trying to grow more sources of income. Over the past ten years, I have grown from just one source of employment income to eight distinct sources. My current sources of income are employment, business, dividend, interest, rental, capital gain from stocks, capital gain from options, and blogging. Except for the employment and rental incomes, all other sources are quite tax-efficient for me.
Income Tax Deductions
For my wife, she has four deductions that she can use to pay less income taxes. She maxed out her Registered Retirement Savings Plan every year so that’s a major deduction for her. She also gets to claim the childcare expenses for our kids as the government only allow the lower-earning spouse to claim that expense. The other two deductions are charity donations and the public transit costs. Sadly, this tax year (2017) is the last tax year that we get to claim the public transit deduction.
When it comes to filing my income taxes, this section is by far my favourite part. I get to deduct the same three deductions as my wife and I don’t get to claim the childcare expenses. Only one spouse gets to claim. What I do get to claim are investment interest expenses, home office expenses, business expenses, vehicle depreciation and maintenance expenses. Together, these deductions reduced my gross taxable income by 27.78%. On top of that, I am also getting a dividend tax credit for my Canadian eligible dividends and a foreign tax credit for my U.S. dividends.
The Tax Refund Comparison
With only four deductions for my wife, there’s very little room for her to increase her deduction to lower her income taxes. I, on the other hand, can have a great deal of flexibility to adjust my income and deductions. If I have a significant amount of capital gains, I can use tax loss harvesting any time during the tax year to offset my capital gains.
I can also invest in my business if my business income is high for the tax year to lower my business income for that year. As a result, I can legally adjust different areas of my income to make it more tax efficient for me during any tax year.
As I review the history of our income tax returns, I noticed that as my income increases, my tax deduction becomes more and more tax efficient. I’ll let the tax refund table below speak for itself.
| Year | My Tax Refund | My Wife’s Tax Refund | Difference |
|---|---|---|---|
| 2008 | $3,973.00 | ($10,531.00) | $14,504.00 |
| 2009 | Lost File | Lost File | Lost File |
| 2010 | $1,918.46 | $2,283.33 | ($364.87) |
| 2011 | $2,650.10 | ($333.89) | $2,983.99 |
| 2012 | $5,008.50 | $656.47 | $4,352.03 |
| 2013 | $6,227.19 | $657.67 | $5,569.52 |
| 2014 | $6,477.36 | $2,647.90 | $3,829.46 |
| 2015 | $10,265.57 | $5,322.78 | $4,942.79 |
| 2016 | $10,423.59 | ($1,741.99) | $12,165.58 |
| 2017 | $17,902.85 | $2,274.31 | $15,628.54 |
Note: A negative tax refund means you need to pay more income taxes
The Average Tax Rate Comparison
When you see my huge tax refund from the table above, it appears that I may have been overpaying my income taxes during the year. However, one number on my tax return will tell you otherwise. My average tax rate will tell you that it’s the efficiency of my tax strategy, not the overpayment of income taxes. This number is the total amount of income tax that I paid as a percentage of my gross income.
| Year | Marginal Tax Rate | Average Tax Rate | ||
|---|---|---|---|---|
| My Rate | Wife’s Rate | My Rate | Wife’s Rate | |
| 2008 | 30.50% | 30.50% | 14.6% | 19.7% |
| 2009 | Lost File | Lost File | Lost File | Lost File |
| 2010 | 30.50% | 30.50% | 14.1% | 16.3% |
| 2011 | 43.00% | 31.00% | 13.7% | 14.8% |
| 2012 | 44.00% | 31.00% | 15.9% | 17.9% |
| 2013 | 39.00% | 31.00% | 13.0% | 16.7% |
| 2014 | 43.00% | 20.00% | 15.4% | 8.1% |
| 2015 | 43.00% | 20.00% | 6.6% | 10.2% |
| 2016 | 43.00% | 31.00% | 13.0% | 16.9% |
| 2017 | 43.00% | 31.00% | 11.5% | 15.9% |
Note: Marginal tax rate is the rate that you pay on your highest tax bracket.
My Two Cents
As you can see from the average tax rate table, it’s not how much you earned. It’s how much you get to keep after taxes. In most years, I get to keep on average about 87 cents of every dollar that I earned. There is no secret tax code that I used that others don’t know about. I just ensure that the incomes (dividends and capital gains) that I earned are tax efficient. In addition, I also ensure that some of my expenses (interest and business expenses) can be used to increase my wealth and help me pay less income taxes.
So readers, have you filed your income tax yet? Do you have any efficient tax strategy that we can use to help us pay less income taxes?
About Leo
This is really great info for your readers, Leo.
Like you, I try to find any way to pay less taxes. There’s a lot for me to learn still, but I know who’s blog I can visit to get some tips and tricks 😉
I try to DIY everything as well! But if it comes to the point where I feel that hiring someone will save me time, I will pay just to buy back time (if it makes sense). Nothing is as valuable as time for me. Of course, if I’m super excited and interested in the DIY task, I’ll diy to learn 😊
Great post, Leo!
@Panda, thank you for the kind words. When it comes to trading off mytime to save money, I also add another non monetary factor to my evaluation. As long as I enjoy the task, I will do it. If I am not enjoying the task and it’s taking too much time, I am more than willing to pay for the service.
One of the tasks that I outsourced is the cleaning job at my rental property. There is no way that I am going to clean after my tenants every other week for four hours just to save $80 bucks per service call.
Nice article. One small adjustment I would make is that a tax refund is not a measure of how efficient your tax payments really are. If fact, too high a refund may suggest missed opportunities to reduce eligible tax deductions in advance via the “Request to Reduce Tax Deductions at Source”.
That aside, the real measure is how much tax is actually paid out vs total income, or % of actual tax paid, a value I like to pay attention to.
Otherwise, good article.
@Smayer97, you’ve got a great point about the huge tax refund not being very efficient. It’s kind of a trick and motivation for me save money. It sounds kinda strange, but the thrill of trying to get more money back each year, motivate me to work harder to manage my finance year round. In addition, it gives me motivation to invest the money wisely once I received the refund.
This is another reason why working for yourself and having your own business income is a great tax incentive! My husband pays less tax than I do percentage wise and he earns more than me. Unfortunately, employees don’t get that many tax discounts. How much of your tax do you get back from deducting your HELOC interest for investing?
Oh wow. Numbers! You almost scared me half to death. Haha. Seriously, I let my husband do the math in this house. He is very good at keeping our finances in good shape, taxes included. I will send the link over to his email so he can read through this article. Thank you for sharing. Hope we get to save even more and make that dream vacation come true!
As I have been single the majority of my adult life, I’ve always done my own taxes. It’s great finding all of the loopholes where one can save money.
I love all the insight in this article! It is my goal in 2018 to get better at money management and I can’t express how helpful this article was. I now have it bookmarked. I am looking to be my own boss and you have given me even more drive!
This is SO interesting! Tax is a big thing for me, I have no idea what I’m doing so we use an accountant just to be sure we are doing it right!
BTW, accountants are good, especially when you do not know anything…but it is always good to understand what your accountant is doing because first, the CRA holds you accountable regardless of what your accountant does or does not do, and second, I many times over the years have found errors that my accountant makes or he does not either apply for an eligible credit or does not optimize my return to get the best deductions. Of course, I have found errors I have made by reviewing what he does too. So it works both ways.
So it is wise to get educated.
Not going to lie, I don’t understand finances and taxes ( I really need to learn all these things) but this is a well written article.
Wow nice leo
A great tax strategy can do wonders. Will look into the links you sent me for next yr. We are getting a massive tax return and then i see your numbers…. haha
Still sweet, keep it up. Whats going to be income #9?
I have always found taxes so confusing and have always had my accountant do it for me. I’m saving this post as this has awesome tips and suggestions!
Honestly speaking, i’m not that into computing my taxes and all that things when it comes to finances. Because I usually get confused and all, but this article is one great read! Very detailed and well explained. Thank you for sharing this information with us. Cheers 🙂