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Reduce Tax Withholdings Today

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Most countries tax employment income at the source when earned.

If you earn $120,000 annually and your effective tax rate is 35%, then each month your employer withholds (and hopefully remits on your behalf) roughly $3500 from your net pay-cheque. At the end of the year, you file your tax return and probably get a refund for overpayments during the year.

Yes, a little more complicated than that. But for young people with only employment income, this is typical. Various deductions and tax credits reduce actual tax payable and allow for a refund.

Tax Refunds Are Great (Not Really)

Now refunds always sound great. Nice to get a cheque from the government. But the reality is that what you owed did not change. Only that you gave the government an interest free loan during the course of the year. And only after you file a return and wait a suitable period, will the government return your money back to you (with no interest for you).

Contribute Tax-Deductible Savings Early

Recently I was chatting with a young fellow about his newly created registered retirement savings plan (RRSP). One item we discussed was that he should make his contributions as early in the year as was possible [4] to maximize the compounding impact over time.

A wise tip for anyone.

Get Credit Immediately for Your Tax-Deductible Items

I mentioned to him that if he shows his Human Resources or Payroll Manager that he has already made his tax-deductible contribution for the year, his employer should be able to adjust his withholdings to reflect the deduction. That means less tax withheld, more money in his bank account each pay period. Instead of giving the government an interest-free loan, he can put the money to work on his own behalf. Over time, the return adds up.

I read a Financial Post article that reminded me of my earlier conversation. “How to get your tax refund throughout the year” [5] looks at ways to reduce periodic withholdings, allowing you to get your money back sooner.

Obviously, rules differ between tax jurisdictions. You will need to explore available options where you live and/or reside for tax purposes. For Canadian tax residents, the article recommends:

An easy way to avoid or at least try to minimize your tax refund for 2013 is to complete CRA Form T1213, Request to Reduce Tax Deductions at Source in which you list various deductions that you plan to take when you file your 2013 return, such as RRSP contributions (other than those made through payroll deduction), support payments or childcare expenses. (emphasis added – jmw)

Send it to the CRA and, if approved, you will receive an authorization letter which you can hand over to your employer’s payroll department authorizing them to reduce the amount of tax withheld at source from your paycheque.

Very good advice.

If you can get money back in your pocket sooner, always take advantage of the opportunity.