Tax Question: RRSP vs Charitable Donations

[runningdog]

I want to know what to do concerning balancing RRSP contributions and charitable donations for this tax year.

For this year my donations are much higher than usual. Next year my income will be somewhat higher than this year and my donations normal.

What are the relative tax reductions for RRSP and charitable donations? How do I “balance” these two things in this and next years’ taxes?

I hope my question is clear enough and thanks in advance.

[adamtheman]

Your tax agent should be able to figure it all out for you... it's not difficult. Without your exact figures it makes it hard. But bottom line, max out your RRSP first if you can, and then only use the tax exeptions from donations if needed.

Remember you can carry over the donations to next year, and you can also carry over your RRSP limit to next year as well. So if your income is going to be considerably higher next year, you may just want to donate enough to drop you down into the lower tax bracket, then save lots of room up for next year.

[2Addicted]

Hmm Adamtheman.. if I may counter-you...


Use all your donations as soon as you can.. here's why:

All the donations over $200 are credited to you at the highest rate of tax (and not your marginal tax rate as RRSP's are..) so it is essentially pointless to put this claim off until next year... as you'll get the same highest rate of tax credited back to you.. and you've waited a year for nothing. (Think time value of money.. get the same refund now.. or next year.. as it will be the same refund either way.)



Now for RRSP's... this is something else..
Deduct them next year if you're gonna find yourself in the next tax bracket next year vs. the current year (with the expected income increase you mentioned).. if you end in the same bracket next year.. then deduct them now.. because it'll again, give you the same refund... you might as well get it now.

The longer you put off your deductions.. I'm sure you realize.. costs you interest in the refund you could have received sooner.. time-value-of-money.. so balance accordingly.. and g'luck!

[FrugalTrader]

Hmm Adamtheman.. if I may counter-you...
Use all your donations as soon as you can.. here's why:
All the donations over $200 are credited to you at the highest rate of tax (and not your marginal tax rate as RRSP's are..) so it is essentially pointless to put this claim off until next year... as you'll get the same highest rate of tax credited back to you.. and you've waited a year for nothing. (Think time value of money.. get the same refund now.. or next year.. as it will be the same refund either way.)


I don't completely agree with this statement. The first $200 of charitable donations give a tax credit at the lowest marginal rate. It would make sense to push forward your charitable donations as long as possible so you only pay the first $200 penalty ONCE instead of EVERY year.

[2Addicted]

Yeah.. I hear ya.. but also if he's got a large lump sum donation..
are you gonna wait 7 year before you get the refund?

to save the few dollars on the tax difference on $200? it's not really much... like $40 bux a year maybe?

Good point though ;)

[FrugalTrader]

Yeah.. I hear ya.. but also if he's got a large lump sum donation..
are you gonna wait 7 year before you get the refund?

to save the few dollars on the tax difference on $200? it's not really much... like $40 bux a year maybe?

Good point though ;)

Yes you're right, if you have a large lump sum then it would be wise to claim it in that year. I was thinking of small timers like me who donate small amounts every month. :)

[runningdog]

Hmm Adamtheman.. if I may counter-you...


Use all your donations as soon as you can.. here's why:

All the donations over $200 are credited to you at the highest rate of tax (and not your marginal tax rate as RRSP's are..) so it is essentially pointless to put this claim off until next year... as you'll get the same highest rate of tax credited back to you.. and you've waited a year for nothing. (Think time value of money.. get the same refund now.. or next year.. as it will be the same refund either way.)



Now for RRSP's... this is something else..
Deduct them next year if you're gonna find yourself in the next tax bracket next year vs. the current year (with the expected income increase you mentioned).. if you end in the same bracket next year.. then deduct them now.. because it'll again, give you the same refund... you might as well get it now.

The longer you put off your deductions.. I'm sure you realize.. costs you interest in the refund you could have received sooner.. time-value-of-money.. so balance accordingly.. and g'luck!

I have bolded two terms above. Could you please explain exactly what you are saying here. I don't understand these two terms.

Thanks.

[kaycee8877]

marginal tax rate means you dont get taxed at a single rate, you get taxed at each bracket as your income moves through it (ie first 33,000 at 21% next 2,000 at 24% next 31,000 at 31%) so someone who makes 500,000 doesnt get taxed at a straight 43.7% (the highest bracket) only income above 118,000 gets taxed at that rate ..... the rest is on that sliding scale of rates


so RRSP you get back basically the % rate of the highest bracket your in (unless the deduction brings you to the bracket below)

donations you get 16% on the first $200 and 29% on the rest ... this is a fixed credit and your income DOES NOT affect the deduction .... (but you cant claim more 'credits' than you have tax payable)

so to finish .. cant you just deduct them both? ... if you can, do so

although the people that mentioned about carrying forward donations as to not keep losing the initial $200 'rate reduction' do have a point .. but is it worth it? .. its $26 .. get the money in your pocket and spend it

[runningdog]

marginal tax rate means you dont get taxed at a single rate, you get taxed at each bracket as your income moves through it (ie first 33,000 at 21% next 2,000 at 24% next 31,000 at 31%) so someone who makes 500,000 doesnt get taxed at a straight 43.7% (the highest bracket) only income above 118,000 gets taxed at that rate ..... the rest is on that sliding scale of rates


so RRSP you get back basically the % rate of the highest bracket your in (unless the deduction brings you to the bracket below)

donations you get 16% on the first $200 and 29% on the rest ... this is a fixed credit and your income DOES NOT affect the deduction .... (but you cant claim more 'credits' than you have tax payable)

so to finish .. cant you just deduct them both? ... if you can, do so

although the people that mentioned about carrying forward donations as to not keep losing the initial $200 'rate reduction' do have a point .. but is it worth it? .. its $26 .. get the money in your pocket and spend it


Thanks to all for your input. I now understand what is being said.

Could someone please tell me where I can find the information about what the tax brackets are for the 2006 tax year. Thanks

[FrugalTrader]

Thanks to all for your input. I now understand what is being said.

Could someone please tell me where I can find the information about what the tax brackets are for the 2006 tax year. Thanks

http://taxtips.ca/tax_rates.htm