Tax credits and tax deductions are two popular methods used to reduce your tax burden and help save you a significant amount of money. While they may seem similar, they work in very different ways.
A tax credit is an amount of money that can be subtracted from the income tax you owe. Tax credits can be issued by federal, provincial, and territorial governments, and can be granted to both individuals and businesses. These credits are subject to change and are typically set out in annual government budgets. Examples are basic tax credit, old age credit, tuition tax credit, old age credit, etc.
Eligibility is determined based on various criteria such as age, location, income level, tax filing status, and industry. The more credits that apply to you, the more you are able to reduce your tax bill by.
Refundable tax credits can be paid to you even if you do not have any income tax payable. On the other hand, some tax credits are non-refundable, meaning they can only reduce or cancel out an existing amount owing.
When you file your return, all of your tax credits are added up based on federal or provincial credits. They are then multiplied by the lowest tax bracket to calculate the amount of tax savings for the year. It is a common misconception that when the government says you have a tax credit of $400 that means your tax savings will be $400. In actual fact, assuming it is a federal tax credit, your savings is $60 ($400 * 15%).
A tax deduction lowers the taxable income of a business or individual, thus reducing their tax liability. Certain expenses or exemptions that were incurred during the year can be subtracted from gross income, to determine the amount of taxable income.
Tax deductions provide a larger savings than a tax credit as they directly reduce your taxable income which will then be used to calculate your tax owing. Examples of these are child care, RRSP deduction, business expenses, professional dues, etc.
While both methods are effective ways to help lower a physician’s tax liability, it is important to understand how they differ and can work in their favour. Our financial advisors work with them to identify the best credits and deductions available to optimize a physician’s wealth.
Have questions on what else a medical professional can deduct? Contact us here for a free 15-minute consultation. We can provide more details!