Retirees can and should use the tax system to their advantage in structuring income to fund current needs, while preserving capital to fund future needs. An important way to do is to plan to generate an income mix that is tax efficient.
Retirees face many tax obstacles when the income mix is wrong. Most middle income Canadians are subject to clawbacks on tax preferences such as the age amount, or on social benefits like the Old Age Security, and suffer "time value of money" problems when they unnecessarily "pay forward" taxes on compounding annual interest returns and possibly, quarterly tax instalments.
Further, the "off-return" taxes—user fees—can often increase dramatically when income structure is not carefully planned and monitored. For example, per diem fees at nursing homes can spike dramatically when net income levels are too high; and public pharmacy care plan deductibles can wipe out assistance for expensive drugs like anti-cancer medication.
Therefore, tax efficient retirement income planning is critical to the financial health of the 55 Plus crowd in particular, and as this group must withdraw taxable pension accumulations from both public and private sources, reinvestments of disposable income must include a careful selection of tax efficient investments. When it comes investing for income solutions, income taxes do matter and in fact, tax efficiency is material in getting the desired results in retirement wealth planning.
It’s Your Money. Your Life. It makes sense to think about tax efficient retirement planning early in life; and then make it an explicit focus late in life.
It's difficult, exhausting, at times heartbreaking. But caring for the sick and the dying is both an honor and a privilege. Compassionate people do so unselfishly and with love, often at their own economic expense. Compassionate societies participate too, however, the question of who should pay and what quality we should expect is always at issue.
Only one third of survey participants in the Canadian Medical Association's 10th Annual National Report Card on Health Care, released late in the summer, rated quality and choice of health care services at an "A" level in 2009; two thirds were dissatisfied with the cooperation between health professionals like doctors, pharmacists and nurses.
Certainly the future health care needs and costs of baby boomers are of great concern. Three quarters of the survey participants felt that more money was needed to provide the same level of health care we are rather dissatisfied with today. Yet, who should pay?
Forty percent thought the wealthiest boomers should pay more out of their own pockets, while another 40% felt all Canadians should pay more; which of course would point a double barrel of financial responsibility directed at affluent boomers! However 60% thought those who use the services should pay a user fee, something that might help deter those who misuse the privilege to be more careful with their health.
What's clear is that's important for a compassionate society to develop a sound strategic plan for the management of an inevitable, but challenging privilege: the care of vulnerable people who have contributed so much to the quality of life we have today.
We've found in our work in professional development of advisors that yes, it;s about the money. But more so, it's about the most effective way to reach the goal: playing out the strategy to enable choice and dignity, without risking the complete exhaustion of the caregivers.
Think about it. . .it's your money, your life. . .how would you want it to all play out?
Higher incomes do lead to higher personal net worth. Consider these statistics from The Wealth of Canadians, a survey released in 2006 on the status of Canadian wealth:
- Family units who reported after-tax income of $75,000 or more in 2004 had a median net worth of $505,700, up 15% from the last five year period ending 1999.
- Family units whose after-tax income ranged between $20,000 and $29,999 saw a 21.2% decline in median net worth over the prior five year period. It sat at less than $50,000.
What does it take to make more money? Two jobs? A higher paying job? Home Equity? If you are a younger person reading these stats, it’s important to think about education levels, which tend to be correlated directly to higher earnings and promotions, and the ability to invest your saved capital in assets, like a home. Work ethic and a healthy, balanced personal life, help too.
If you are older, tax efficiency becomes more and more important. In an environment of low investment returns, every percentage you can earn back in marginal tax savings, will directly increase your income. That’s important and worth your consideration.
Therefore, year end tax planning—an activity we will talk about in detail in the upcoming national Canadian tour I will embark upon with my colleagues next month—is an important consideration taxpayers and their advisors. I hope we’ll have the pleasure to meet and think strategically about increasing your income and your wealth in 2010.
Are you planning to give to your favourite charity this year? Now’s a good time to do so, with Thanksgiving just around the corner. In fact, in our family, we like to think about our giving to the community at Thanksgiving and again at Christmas time. It’s wonderful to share our good fortune, and the bonus is a tax credit too come tax filing time!
Did you know that your gifts may qualify for a tax credit if you donate to the following:
- registered charities, registered Canadian amateur sports associations, a Canadian municipality or province, or Canada,
- charities outside Canada to which the Government of Canada has made a donation in the prior 12 months,
- the United Nations and its agencies,
Note that donations to U.S. charities qualify too, to the extent that the taxpayer has U.S. source income which is taxed in Canada. Thus, the donations claim limit is 75% of U.S. source income for U.S. charities that do not otherwise qualify.
On the personal tax return, charitable donations made to a registered charity qualify for a 15% federal credit on the first $200 given; 29% on amounts over this. When provincial tax benefits are included an average credit of 25% to 45% can result. Each individual can give up to 75% of net income for the year, that rises to 100% in the year of death. Gifts made in the current year or in any of the immediately preceding five years are claimable on the 2010 tax return. Qualified gifts include cash, capital property such as publicly traded shares, mutual fund units, life insurance policies, Personal-Use property.
It’s Your Money. Your Life. This Thanksgiving, give generously, if you can.