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How to Split Pension Income to Minimize Your Taxes
Pension splitting is designed to let couples with pension income average their income to take advantage of the lower of the two tax brackets. Many people think that you transfer a pension income from the spouse with the higher income to the other spouse and then split the amount - that would make the two incomes equal or similar in a way that would be most beneficial to the family.
Does this sound correct? Maybe, but only in certain cases. Our tests show that over 70% of couples would NOT get the maximum overall benefit this way.
  1. The average income approach only applies to couples whose situations and claims are similar, e.g., both are under or above 65 years old, both are claiming or not claiming medical expenses, both non-refundable credits are similar, etc. In this case, as long as you can move the two incomes into same tax brackets, any split amount can get you the maximum;

    If you can't place the two incomes into the same tax brackets even after you have split the maximal amount, then the maximal split is the best.

  2. If one spouse is under 65 and the other spouse is not, chances are the two incomes could never be in same tax rate. In this case, if spouse A is 65 years or older, you should make A's income lower than B, but not to the point that it falls into a lower tax bracket. If you also have medical expenses, you should let A claim medical expenses, unless you live in Ontario, where you should always test and see because no simple rule works for all.

  3. If the higher income spouse has no pension income but the spouse with the lower income (A) is receiving a certain amount of pension, pension splitting from lower income to higher income can also increase your family refund, even if A's income is so low that no taxes are paid.

  4. If spouse A has extremely high income but only a small part of it is pension income, if the other spouse (B) has more than $2,000 in pension income but little other income, or if the pension income from A will become ineligible pension for B, then even if B's income is so low that no taxes be paid, no splitting should be made.

  5. In Ontario, there are surtaxes, tax reductions, health premiums and so on. The marginal tax rate is very complicated and can seem very wild. A low-income person having a higher tax rate is not very rare. In this case, you really need to get very clear about your tax situation to find out what's the best for you. There are no simple rules to tell you what to do here.
In Situation #1 referred to above, the same tax brackets are easy to find and you can easily get to a optimal split amount. In all the other scenarios, it is difficult to find your actual tax rate and, most likely, there is only one split amount that can give you the maximum tax refund, and one dollar less or one dollar more will make you get less.
Also, if one spouse has carry-able tax credits, which means that if you can't claim them all this year, you can claim the rest in future years. Then, when you compare the total tax refund, these credits should be taken out.
No matter how complicated your situation is, Tax Chopper can always predict the maximum refund pension split point for you. And no other software can do the same. That means Tax Chopper can give you a bigger refund than any other service.
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