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Proposed Pension Income Splitting is Good News for Seniors
The surprise Tax Fairness Plan announcement on October 31st included a couple of good news items for seniors. The two measures that were proposed are an increase to the age credit amount and pension income splitting for senior couples. Although there are not many details yet available, here is a summary of what we know so far.
Age Credit Amount
The age credit is set to increase by $1,000 to $5,066 and this increase is slated to take effect retroactively to January 1, 2006. Since the age credit is income tested, with the $1,000 enhancement, the credit will be completely eliminated when net income reaches $64,043 (previously $57,377). For low and moderate income seniors, this could mean a federal tax savings of $155 each year.
Pension Income Splitting for Seniors
The other proposed measure that could impact millions of seniors and baby boomers nearing retirement is allowing pension income splitting between couples beginning in 2007. Under the current tax system, pension income splitting is limited to CPP/QPP retirement benefits and the use of spousal RRSPs.
Individuals who receive income that would normally qualify for the pension income credit will be able to split up to 50% of this income with their lower income spouse.
For individuals who are 65 years of age or older, this would include defined benefit pension plan payments, lifetime annuities from registered plans and RRIF payments.
For individuals who are under the age of 65, only defined benefit pension payments and lifetime annuity payments from registered plans would qualify for pension income splitting.
Since the pension income splitting mechanism will increase the lower spouse’s income, it could result in the overall lowering of a couple’s annual tax bill. Each year the couple must jointly agree on the allocation of the pension income on their tax returns.
Conclusion
Keep in mind that these are only proposed measures at this time. We will keep you up to date on the changes as more information becomes available.