Tax Impacts of Getting Married
Have you already taken the trip to the altar or plan to in the near future? Beyond a commitment by two people to unite, marriage involves financial changes on many levels. There are several schools of thought on the subject. One thing is definite, from a tax perspective, this new step involves both advantages and disadvantages. What are they?
True or false?
From a tax point of view, common-law spouses do not have the same tax obligations as married or civil union spouses. False!
Since January 1, 1993, common-law spouses who have been living together in a marital relationship for more than twelve months or who have a child together have the same tax obligations and rights as married spouses. In other words, one of the common-law spouses can consider the other spouse as a dependant and benefit from a tax exemption. Of course, certain conditions apply!
Tax advantages of being married
1. Tax credit for medical expenses
It is usually more advantageous for the lower income spouse to claim this credit, as the federal government provides a non-refundable tax credit for the total eligible expenses minus the lesser of $2,397 or 3% of one partner’s net income. If these expenses are claimed by the lower income spouse, the amount claimed as a medical expense can be maximized.
You can pool your donations on one of the returns to maximize this non-refundable tax credit. Therefore, if one spouse does not need this credit to reduce taxes, the other spouse can take advantage of it by declaring their combined donations.
If one spouse has a low income, the other spouse can take advantage of the non-refundable Dependant Tax Credit by using the spousal amount. To do so, the lower-income spouse must have reported less than $13,229 to the federal government and less than $15,532 to the provincial government.
You have until age 71 to contribute to your RRSP. However, if your spouse has not yet reached the age limit, you can continue to save taxes by contributing to the spouse’s RRSP. You can then deduct this contribution on your income tax return. Be careful not to exceed your own RRSP contribution limit. Contributing to your spouse’s RRSP can also be advantageous if you expect to receive a higher income than your spouse at retirement. Note that everything you contribute to your spouse’s RRSP now belongs to your spouse.
5. Transferring credits between spouses
For Quebec purposes, if you have a refund, you can transfer the amount to your spouse to offset any tax you spouse may have to pay.
6. Retirement fund
At the end of the year, if you or your spouse was 65 or older and received eligible pension income, the lower income spouse can include up to 50% of the higher income spouse’s pension income on his or her return. This approach allows the lower income spouse’s tax rate to be applied to the split amount, resulting in potentially significant tax savings for the couple.
7. First-Time Home Buyer’s Tax
If you become a first-time homeowner, but your spouse owned another home in the year of acquisition or in the four preceding tax years, you cannot use the Home Buyers’ Plan (HBP) option to purchase or build a qualifying home. Like the First-Time Home Buyers’ Tax Credit, the HBP is subject to the same conditions. However, if you or a family member qualifies for the Disability Tax Credit, you do not have to be a first-time home buyer to take advantage of this credit, provided that the new home allows the person with a disability to live in a home that is more accessible and makes performing daily tasks easier. Click here to learn more about the first-time home buyer’s credit.
Tax disadvantages of being married
Many credits based on family net income, such as the Solidarity Tax Credit, the GST Credit, the Working Income Tax Benefit and the Canada Child Benefit, will now be calculated based on the spouses’ combined income. This means that if you used to receive these amounts before you and your spouse filed your returns together, chances are that you will receive a lower amount. In other words, these amounts decrease when your income increases.
You can find out more about couples and taxes by clicking here.
If you have any questions, contact us! Our team will be happy to help.