Exploring Tax Cost Averaging to Save Money

There are a number of authors whom I have found to be very interesting and enlightening. One of these authors is Evelyn Jacks, a successful authority on Canadian Tax Savings. While I won't go into detail on the specifics of her recommendations, I will say that after reading her books (of which I currently possess several), I come away with a greater awareness of the opportunities that a clever and motivated individual can pursue to save money and build wealth.

One such idea is the concept of Tax Cost Averaging. Put simply, this is the process of moving away from a year by year perspective and taking a longer term view of tax planning. In order to get the benefit from this, a person has to look beyond the current year and project their income and lifestyle over the next five years.

Knowing incomes and choices (family events, home, car, travels, etc), and astute tax planner can then restructure the financial details surrounding these items. Tax savings can be obtained by anticipating the expenses over time, and deteriming a productive or suitable use.

Over a five to ten year period, there are different opportunities to reduce taxes through some techniques including:
- deducting home office expenses
- deducting qualified automobile expenses
- distributing income to other family members
- capitalizing on existing tax programs like RRSPs
- deferring or delaying tax payments for business transactions

Even if there is no material gain from applying a technique, a prerequisite of Tax Cost Averaging is to make a financial plan, and track the results according the plan. As as they teach us in Business 101, what gets measured gets managed. Record keeping is essential for this program, not only to find tax-saving opportunities, but also to defend and protect yourself in the event you are randomly selected for a tax audit.

Assuming that a Tax Cost Averaging program can save 8% (8 cents on the dollar), that savings can be seen as equivalent to a 13th month of payment. Instead of having too much month at the end of the money, there is an extra surplus to apply towards credit card debt, short-term expenses, or long-term wealth building initiatives.