5 Income Tax Tips for Seniors
One of the great ironies of retirement is that preparing a tax return seems to get more complicated than it was when you were in the workforce. Never fear—these smart income tax tips for seniors should help steer you through tax season.
Confused about income tax? You’re not alone!
Even geniuses can be confounded by the idiosyncrasies of personal finance: Albert Einstein once purportedly claimed that “the hardest thing in the world to understand is the income tax.” So, if you’re having a hard time trying to make sense of your T1s and T4s, you’re not alone-especially if you’re fully or semi-retired. As we age, our forms of income change, which can affect our returns. Here, some pointers to help you master your taxes.
1. Plan Ahead
Year-round organization is key, says Cleo Hamel, a senior tax specialist in Calgary. “You don’t know how much your expenses will be unless you’re keeping track of them on a monthly or bimonthly basis.” Mark key expenditures on a calendar, keep a folder to organize your paperwork and hang on to receipts for medical items such as prescriptions and dental work. Don’t throw away any of your charity donation receipts-they can be claimed within a five-year period.
2. Understand Your Income
Over 65 and working part-time? If you receive old age security (OAS), you need to be mindful of any supplementary money coming in. “Once a person’s income exceeds approximately $71,000 a year, the government starts to claw back some of the [OAS],” explains Junaid Usmani, a chartered accountant in Mississauga, Ont.
3. Divide and Conquer
Pension splitting is a great option for married or common-law senior couples. It allows the higher-earning individual to share up to half their pension income (excluding the Canada Pension Plan) with their lower-earning spouse. The goal is to level out both partners’ incomes so one isn’t taxed significantly higher than the other. Consider consulting an accountant early in the year to make sure the spouse who makes less isn’t bumped into a higher tax bracket.
4. Snowbirds Beware
If you prefer to spend the chillier months down south, tax returns can get tricky. ”You have to be compliant in both countries,” warns Hamel. Here’s an example: if you own property in the United States that you live in for half the year and rent out the rest of the time, you likely need to file a U.S. tax return, as well. If you have residential ties to Canada (i.e., you own a home and/or keep bank accounts in this country), you’re likely still considered a Canadian resident. Usmani adds that it’s crucial to identify all of your assets outside of Canada or you could face penalties of up to $2,500 a year for failing to report.
Check out 9 Tips for Canadian Snowbirds!
5. Mind Your Investments
Contributing to investments such as an RRSP provides a tax break, but withdrawn money is considered taxable income. By the end of the year in which you turn 71, you need to have done one of the following with your RRSP: withdrawn the funds, converted them into a RRIF or used them to purchase an annuity. But don’t wait until the last minute to do so. “When the calendar turns from 2017 to 2018, if you still haven’t done anything with your RRSP, it’s considered withdrawn,” says Hamel. “And you’ll be hit with a tax bill.”