Recently Retired? Tax Filing Can Be Complicated

Recently retired?  There are many new provisions on the tax return that could apply to couples  for the first time, so filing early and with qualified professional help can be important. How you treat private pension income and Old Age Security benefits, for example, can have many positive tax outcomes.

Cutting Taxes on Private Pension Income. Filing a tax return at the same time as your spouse when you start receiving periodic benefits is paramount.  This is because you may be able to jointly elect to split up to 50% of eligible pension benefits to get a better tax result.

The election is made year-over-year on Form T1032.   You can split private pension benefits from an RPP (employer-sponsored Registered Pension Plan) regardless of age, but to do so with RRSP savings, you must wait to age 65 or later.  However, it’s possible to do some tax planning with your spouse; that is, consider withdrawing taxable RRSP amounts in the hands of the lower earning spouse first – in the years before age 65 – and then split the accumulations between spouses at age of eligibility.

You’ll want to adjust your prior filed returns now if you didn’t elect pension income splitting in the past, but qualified to do so in the past 3 years.  Be aware that the election for your 2011 pension income benefits expires on April 30, 2015. Also do note that you can’t claim both the Family Tax Cut and pension income splitting, so if you still have minor children at home while collecting your pension benefits, work out the best tax benefit.

Using Options to Defer OAS.  The annual Old Age Security (OAS) benefits to be reported as income in 2014 are $6,676.59.  Recall, the monthly amounts change every quarter, if indexing is applied, and they are taxable.  However, a high income clawback kicks in when net income reaches $71,592.  The OAS is completely clawed back if net income is over $116,103. 

That’s a nasty surprise, but in addition, OAS benefits will be reduced or eliminated at the start of the next benefit year in July.  Therefore taxpayers who qualify to make an RRSP contribution – for themselves or under a Spousal RRSP for a younger spouse –could trigger tax savings and eliminate the OAS problem too.

Another good idea is to consider deferring the OAS to age 70.  That’s a great way to embellish future benefits by about 40%.  This makes plenty of sense, too, for those who lose their OAS to the clawback anyway. Check this out with your tax advisor.
 

Evelyn Jacks is President of Knowledge Bureau, a national educational institute focused on continuing professional development courses for advisors. See www.knowledgebureau.com for an invitation to the Knowledge Bureau Report, or register for professional online courses to shore up your knowledge on tax, retirement, business, succession and bookkeeping services.