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Five Tax Strategies Retirees Should Consider
Navigating through the complexities of tax planning can be specifically challenging for retirees in Canada. As the financial landscape changes with age, understanding and implementing tax strategies becomes critical to enhance financial stability and maximize savings. This year, Canadian retirees and seniors have different opportunities to improve their tax situation. From pension splitting to leveraging age-related tax credits, this approach can considerably impact your financial well-being. Below, we look at the five strategies retirees in Canada should consider to reduce their tax burden and enhance their retirement income.
Split Your Pension
If you are a senior in Canada making above a certain amount, the Canada Revenue Agency (CRA) imposes a 15% Old Age Security recovery tax on the excess income or the amount exceeding this specific limit set. For 2024, this income threshold is set at $90,997, but keep in mind that it changes yearly. To lessen this tax burden, consider splitting some of your pension income with your spouse if they earn below this threshold. This strategy can help you maximize your household income and save on taxes.
Let’s say your income is $100,000 per year, and your spouse earns $80,000. To avoid the OAS recovery tax for 2024, you could transfer $10,000 of your annuity, RRSP, or RRIF payments to your spouse. This would adjust your income to $90,000, keeping your family income the same while ensuring neither exceeds the OAS clawback threshold of $90,997.
Share Your Pension
If you and your spouse or common-law partner have different Canada Pension Plan (CPP) payments, sharing your CPP benefits can be beneficial. The CRA calculates the shared amount based on the duration of your partnership during your working years. This approach can help balance your income, increasing one partner’s income while decreasing the other’s, and provides tax advantages similar to pension splitting. Sharing your CPP helps manage your household finances more effectively and maximizes your tax benefits.
Utilize the Age Amount Tax Credit
Canadian taxpayers aged 65 and older can obtain benefits from the age amount tax credit. For the 2023 tax year, if your annual income is below $42,335, you can claim up to $8,396. However, as your income increases, the credit amount reduces, phasing out entirely for those earning more than $98,309. This tax credit can help lower your tax bill, making it an essential benefit for seniors managing their finances.
Sharing Unused Age Amount Credits in Canada
The age amount credit is designed to lower your tax bill, though it can only reduce what you owe. If your tax liability reaches zero and you still have unused credits left, you don’t lose out – you can transfer them to your spouse or common-law partner. For instance, if you only need $4,500 of your age amount credit to wipe out your taxes, the remaining credit can be transferred to your partner. This move helps lower their tax burden and ensures you benefit from available tax relief.
Maximize Your Tax Savings with Medical Expenses
Are you aware that you can claim medical expenses on your tax return in Canada? It’s a great way to save money, especially if your costs exceed 3% of your net income or $2,635 (the maximum for 2023). Make sure to hang onto those receipts for everything from prescriptions to new air conditioners – you can claim a wide range of costs. For example, if you have chronic health problems, you might qualify to claim half the cost of a new air conditioner. Similarly, Canadians with celiac disease can claim the extra expenses of gluten-free food compared to regular groceries.
Conclusion
Implementing efficient tax strategies can make a great difference in the financial health of retirees in Canada. The strategies mentioned above, including sharing CPP benefits, transferring unused credits, claiming medical expenses and utilizing age amount tax credit can significantly decrease their tax liabilities. It’s important to stay informed and plan as the threshold and tax laws change annually to ensure a more stable and secure financial future. By considering these tax approaches, retirees can enjoy a more comfortable retirement and better navigate their financial journey.