It is that time of year again, when parents and students are getting ready to complete their Income Tax returns.
I just know it is everyone’s favourite task. Here is some information for you that just might make it a bit easier to swallow.
Most University and College students take their slips to the closest income tax agency that is willing to discount their return so they can get their money right away. It’s not such a bad idea, right?
In some ways it’s good, students are taking responsibility and getting their taxes done, on the other hand, is it the right thing to do?
Fast is not always best.
After my daughter left for University, I started doing her Income Tax. Every year she would complain to me that her friends were getting more back than she was and that I must be missing something.
It took some explaining before she understood that in the long run, what I was doing was better.
Most students are interested in getting the most money back as quick as possible, and that is precisely what some tax preparers are doing for them.
And, what some tax preparers’ are doing is by-passing the T2202A form completely and claiming the WITB (Working Income Tax Benefit) instead, thereby increasing the tax credit so that the student gets back the money they paid, as well as an additional $500. Sounds great right…..WRONG!
By not claiming the credit, amounts claimable by the student, cannot be transferred to an eligible person to offset income, and any unused amount cannot be carried forward to offset future income.
The WITB is designed to help those that earn a low income, but is not eligible for students. By claiming the T2202A, the student cannot claim the WITB and their refund is limited to what they paid that year in income tax. Not so great for them.
In the long run, the return on the T2202A is substantially higher than the $500 per year provided by the WITB.
By claiming the T2202, the government allows the student to claim not only their tuition amounts, but an education and textbook amount for every year they are in school, AND these amounts if not needed to reduce their taxable income to $0, can be partially transferred or carried forward to offset future income.
There is no deadline on how many years it can be carried forward, only that once there is taxable income, the carry-forward amount will be reduced until it has been completely used up.
Let’s take a look at this more closely using 2013 as a basis for our calculations.
Mary is in her first year as a full-time student at University. She pays tuition of $5700. Since she is in school for 8 months full time, she will receive the T2202A form allowing her to deduct the tuition paid, an education credit of $400 per month, plus the textbook credit of $65 per month, for a total of $9420. Mary also had a summer job where she earned $5000 to help pay for her schooling.
Since Mary is not earning more than $5000, her basic tax credit will decrease her taxable income to $0.00 and she is able to transfer the maximum amount of her T2202A to one of her parents, a grandparent, common-law partner or spouse.
In this case, she is going to transfer it to her father. The maximum transferrable is $5000 Federal and $6620 Provincial or Territorial. It should be noted, that Mary should only transfer the amount that can be used by her father to reduce his income and the amount can only be transferred to one person in any year.
Now, let’s say that the parent earns $60,000 per year income. Once they apply the T2202A transferrable amounts to their income tax return, their taxes payable are decreased by $1,085. Imagine how far that will go to help reduce their student loan. After 4 years if everything stayed the same, this would be $4,340.
Now, let’s take a look at the amount the student can carry-forward to offset future income. Let’s assume that nothing changes over the next four years and Mary transfers the maximum to her father.
Mary still has $4,420 federal and $3,200 of Provincial credits per year to offset future income. After 4 years, this is $17,680 Federal, and $12,800 Provincial. Add to this the basic tax credit of $9,574 and that is a significant saving that can be used to pay off loans.
Based on the 2013 T1, the student could earn $20,000 tax-free and still have some amounts to carry forward. On $30,000 of income, assuming they paid no CPP or EI, the amount payable of $4008 suddenly drops to $653, a gain of $3,355.
What is the lesson learned?
Be patient and use the tax credits for education that are provided, and transfer what you can to someone in a higher tax bracket, or carry forward the full amount to offset future income.
In our example, if the four years are carried forward, that would equate to $37,680 Federal and $39,280 Provincial credits plus your basic tax credit that could be earned tax-free.
In our example, this amount equates to almost $7,700, depending on the tax bracket of the individual, the amount may be higher or slightly lower.
In either case, it is still a lot more than the $2000 the student is getting back. Don’t forget that the immediate refund is being discounted by the tax preparer, which will lower this amount even more.
Which would you choose?