As people scramble to file their 2015 income tax returns by the April 30 deadline, married couples and common-law partners have many advantages over people who are single, widowed, divorced and separated. That leaves a significant percentage of people age 50 and older at a disadvantage, which governments should address. Married and common-law people can split pension income, while combining medical expenses and charitable donations on one person's return. Many of them can claim a spouse or common-law partner amount or family caregiver amount, and perhaps transfer the age, pension income, disability and education amounts to a qualifying spouse or partner. They can also do some income splitting through a low-interest spousal investment loan.
Governments could help single, widowed, divorced and separated people by creating a “home alone” refundable tax credit, reducing the net income threshold before they can claim medical expenses, and raising the clawback levels before they start losing the age amount tax credit. Pension income splitting allows one person to move as much as one-half of their eligible pension income to their spouse or common-law partner. For people 65 and older, that includes income from corporate pensions, Registered Retirement Savings Plan annuity withdrawals, Registered Retirement Income Fund withdrawals or life annuity benefits. For people under 65, only corporate pension and certain benefits from the death of a spouse or partner are eligible. Pension splitting allows both people to claim tax credits on the first $2,000 of pension income.
It's usually best transferring pension income from higher income person to a lower income person. But if they're in the same tax bracket, moving income to the higher earner usually lets the lower income person claim more medical expense tax credits. People receive credits on medical expenses greater than three per cent of their 2015 net income or $2,208 federally and $2,353 provincially, whichever amount is less. Couples usually get more credits by combining expenses and having them claimed by the person with the lower income. Charitable donations offer combined federal and Alberta credits of 25 per cent on the first $200 of donations and usually 50 per cent on the amount greater than $200. Combining donations on one person's return means the lower 25 per credit applies only once, saving the couple $50.
Taxpayers can stay in a lower tax bracket by reducing income or by increasing deductions or credits. You receive age amount tax credits for being age 65 or older, but start losing the federal credit if your 2015 net income was more than $35,466 and you lose the provincial credit completely if income exceeded $71,624. Another threshold concerns Old Age Security benefits, which you start losing or having to pay back if 2015 net income exceeded $72,809 and you lose entirely if income was more than $118.055. Contribute to a Tax-Free Savings Account while in a lower tax bracket when you're young or working part-time, and make withdrawals when you're making lots of money. Conversely, contribute to your RRSP during your prime earning years and withdraw the money while in a lower bracket, presumably after retirement.
But some people who are unemployed or working part-time before age 65 may have less taxable income than they will after age 65, when company pensions, government pensions and personal retirement plan withdrawals put them in a higher tax bracket. They should consider taking money out of their RRSP while pre-retirement income is low and putting it into their TFSA, then after they start collecting retirement income they can make TFSA withdrawals without paying tax.
Many seniors have to pay quarterly tax instalments if they owed more than $3,000 on their tax returns in two of three years. But if you had a huge one-time spike in income during 2015, you may not have to pay as much in instalments during 2016 as CRA asks. People who file their returns after April 30 face a penalty of five per cent of any amount owed, plus one per cent interest per month until it's paid. If you don't file your return before the deadline, make an instalment payment for the expected amount owed before April 30, but confirm that instalment is applied to your 2015 taxes.