While you’re definitely still worrying about filling out and filing your 2015 tax return, there are quite a few tax changes coming for 2016. Since we are all currently earning money and paying taxes in 2016 it’s important that we understand how these changes will affect the year ahead of us.
Should you file your tax return early this year? Learn here.
Just remember that these changes (if fully enacted) will not affect the 2015 tax season, but since “tax season” really does last all year, we want you to be as prepared as possible should any of these changes greatly affect your life.
New Tax Rates and Tax Brackets
A few new tax rates have been proposed for 2016 and the following year, mostly to help alleviate some of the tax burden from lower income families, here are the changes:
- The current 22% tax rate bracket will be lowered to 20.5%; this will affect people who earn between $45,282 and $90,563.
- A new and higher tax rate bracket of 33% will be established (it was previously 29%); this will affect people who earn more $200,000.
- The middle-class tax cut, which is typically worth $330 a year, could go up to $679. Those who earn more than $90,563 will benefit from this middle-class tax cut.
- For those who earn more than $216,975, any benefit of the middle-class tax cut will be lost as their tax bracket has been increased from 29% to 33%.
Changes to Tax-free Savings Account Contribution Limits
As of January 1, 2016 Canadians can now only contribute a maximum of $5,500 to their Tax-free Savings Account (TFSAs). The Harper government had increased it to $10,000 in 2015. The $10,000 maximum for 2015 has not been changed and for those Canadian taxpayers who did not contribute the maximum, you will be able to carry over the balance.
The “Kiddie Tax”
It’s important to note that the new 33% tax rate bracket will affect what is commonly referred to as the “Kiddie Tax”. For those who are unsure of what the “Kiddie Tax” is, here is a simple explanation:
- The “Kiddie Tax” was created in 1986, as part of the Tax Reform Act, to prevent people in higher tax brackets from trying to avoid paying taxes on certain income they received from investment assets by transferring them to their children.
The “Kiddie Tax” is often criticized but none the less it still exists and needs to be carefully considered especially now in relation to the creation of the 33% tax rate bracket. Here’s a breakdown of how it could affect you in 2016:
- The “Kiddie Tax” is applied to unearned income paid to children age 19 and under and students under 24 years old.
- The first $1,050 worth of unearned income that a child receives is not taxed.
- The next $1,050 worth of unearned income that a child receives is taxed at the tax rate of the child.
- Any unearned income above $2,100 will be taxed at the tax rate of the parents. This is where the new 33% tax rate bracket comes in.
More Changes to Come
For those who will be affected by the new 33% tax rate bracket, more tax changes might seem like too much to handle, but we should all prepare ourselves as there are in fact more changes to come as we move quickly into the New Year. The changes mentioned above still haven’t been approved by Parliament yet but we should expect them to be approved shortly. The new Federal government will more than likely unveil its 2016-2017 budget in March, this is when we should expect to hear confirmation about changes in tax legislation, including:
- Changes to or the elimination of the family tax cut.
- A new Canada Child Benefit. This is expected to be a tax-free monthly payment for qualified families with children under the age of 18.
Taxes in general can be extremely confusing and complicated, adding on changes and new legislation can often make it seem like you’ll never have a proper grasp on what you need to know. We get it, no one wants to be that stressed out about their taxes, and this is exactly why we want you to prepare yourself as early on in the year as possible. Every Canadian’s tax situation is different so it’s important that you understand how these and any other changes will affect you and your family.
Need some help dealing with tax season? Read all about the dos and don’ts.
