Stop receiving tax refunds. Break the cycle of giving the government an interest-free loan.
If the amount of tax withheld from your pay is not reduced at source you likely receive a tax refund shortly after you submit your tax return. If this is the case, I urge you to put an end to this cycle because tax refunds represent the overpayment of taxes. When you overpay your taxes you are giving the government an interest free loan.
Think about it. Where do you think your tax refund comes from? From the taxes you overpaid.
Here are a few easy steps to follow to break the cycle.
In order for your employer to automatically reduce the amount deducted at source, it will require a LETTER OF AUTHORITY from a tax services office. This letter is obtained by completing and submitting a Form T1213 Request to reduce tax deductions at source, together with documentation to support the request. Through personal experience, I have found it can take 4-6 weeks for Canada Revenue Agency (CRA) to process your request.
Chapter 5 of the T4001 Employers’ Guide – Payroll deductions and remittances pdf document updated December 23, 2016 has details on the steps to follow.
Quebec residents wishing to reduce the amount of provincial tax deducted at source must complete and submit with supporting documentation a TP-1016-V Application for a Reduction in Source Deductions of Income Tax.
Self-employed individuals must make tax instalment payments based on 1 of 3 methods of calculation:
- amounts indicated on reminders sent by CRA. This is the “no-calculation” option.
- your prior year’s net tax owing and any CPP premiums payable. This is the “prior-year option”.
- your estimated current year tax and CPP premiums owing. This is the “current-year option”.
If you use the current year option, your RRSP contributions will reduce the current year estimated taxes owing.
Be aware that if your installments under this option are insufficient to cover your current year taxes, you may be subject to interest and penalty charges.
Visit CRA’s website for more details if you pay your taxes by way of instalments.
If you are a US resident you can adjust your withholding taxes the old-fashion way (paper) or online.
If you prefer the paper method, there are worksheets on the W-4 form. I recommend you use the instructions provided by the IRS at the IRS Tax Withholding webpage if your tax situation is more complicated.
For those who use TurboTax to file taxes electronically, there is a W-4 Withholding Calculator. This tool simplifies the process. Answer a series of questions and the withholding amount is computed for you.
Should the calculations be different from your current withholding, ask your employer for a fresh W-4. You can claim as many allowances as warranted by your personal situation.
In the event you wish to increase withholding taxes, enter the actual amount you want deducted on Line 6 (“Additional Withholdings”) of the W-4.
NOTE: You can adjust your W-4 at any time during the year. Be mindful that adjustments made later in the year will have less impact on your taxes for that year.