Tax credits: Use them or lose them

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Clients often wonder whether it makes sense to save up their eligible tax credits—like those for charitable donations—over several years and claim them all at once.

Unless they’re not paying tax at all, the answer to that question is usually no: if they have them today, they should claim them today.

Waiting to claim them doesn’t really help, no matter what your tax bracket is today or might be down the road, according to Adam Scherer, partner at Soberman LLP. The way tax credits are designed, they’re “basically equivalent to a deduction at the lowest rate of tax,” he says. “Whether someone’s in the third bracket or the highest bracket, it really doesn’t make a difference.”

Negligible savings Charitable donations and other credits fall under the “use them or lose them” rule. For charitable donations, the first $200 each year will always be credited at the lowest rate. Because of that, it might seem sensible to save donation receipts and claim them all in a subsequent year.

But the savings of doing that are negligible, according to Scherer. Even if a client makes small donations this year and next but plans to donate a large sum in three years, “you’d basically make an extra $40 for waiting, $80 in total,” he points out. “You’ve waited three years to get the money back. It’s not the best investment in the world. Just take the cash when you can.”

The exception Medical expense claims are the one exception to the rule. When it comes to these claims, clients or their tax practitioners can choose any 12-month period to claim them. For example, if a client incurs expenses worth $2,500 in December, but plans to have eyes correction surgery the following April, it can make sense to save the December expenses and claim them the following year.

Anything medical paid out of pocket—including prescription drugs, dental work and most of the therapies ending in “y” (osteopathy, psychiatry, physiotherapy, doctor-prescribed massage therapy)—qualify for the credit.

However, not all medical expenses are eligible—the first $2,000 in expenses will not qualify for credit, assuming the client is earning over $65,000.

(04/06/10)

This Advisor.ca Special Report is sponsored by: