Tax Time

One nice thing about tax preparation software is one can come up with hypothetical tax situations and see where they lead without having to do all sorts of convoluted calculations by hand. So I imagined two people, made them each others’ spouse and both living together in the province of New Brunswick. I then added the following criteria:

a) If either of them works, it is as an employee, not as a self-employed person.

b) They have no other revenue beside their employment income.

c) The couple has no dependents, neither children nor other people.

d) Neither has any deduction to claim, not even contributions to a registered retirement savings plan.

e) The only non-refundable tax credits either one can claim are the Basic Personal Amount, the Spouse or Common-law Partner Amount (where applicable), the Canada Pension Plan contributions, the Employment Insurance contributions, and the Canada Employment Amount.

With those criteria in place, I set about calculating the amount of tax payable for situations where the total household taxable income came to $100,000.

In one case, each earned $50,000. After entering the proper amounts and letting the software do the rest, each owed $9,978.51, for a household total of $19,957.02. In the second situation, one earned $65,000 and owed $15,153.51, while the other earned $35,000 and owed $5,447.78. The two amounts owing combined come to $20,601.29. The means a couple where both members earn $50,000 pay would pay $644.27 less in income tax than the couple where one member earns $65,000, and the other, $35,000.

In the third case, one member of the couple earned the entire $100,000 for the household. In this case, even when factoring in the Spousal Amount, the total household income tax bill comes to $25,917.32. This is $5960 more than the couple where both members earn $50,000 each, which I find rather exorbitant. In case you were wondering, the total tax bill would reach $46,572.95 if the working partner earned $150,000 instead.

By now, you’re probably wondering where all this is leading. Just a little more to this preamble, if you please.

According to the General Income Tax and Benefit Guide – 2010, a person may claim allowable medical expenses which exceed either 3% of his or her net income (line 236) or $2,024, whichever is less. A couple can elect to declare all their allowable expenses on a single tax return, and add those of their dependent children as well. They will usually do so on the form of the lower income earner since that threshold will be lower and the credit can be more fully used.

The example given in the guide is about “Rick” and “Paula,” whose medical expenses for the year total $4,300. Paula’s net income is $32,000, so three percent of her income is $960. Rick’s net income is $48,000, so three percent of that is $1,440. Clearly, it makes more sense to claim the medical expenses on Paula’s return because $4,300 minus $960 is higher than $4,300 minus $1,440.

Keep in mind that the expenses must exceed three percent of the net income OR $2,024. The amount of $2,024, the maximum threshold for 2010, works out to three percent of just slightly more than $67,466. This means anyone earning, say, $67,467 or more will not have to subtract more than $2,024, no matter how much money is earned throughout the year.

Now, on to the main point. One year I was looking for a way to shave money off my tax bill and decided to try calculating the family’s allowable medical expenses. At the time, there were no out-of-province medical trips, nor even any out-of-town medical trips, so everything hinged on insurance plan premiums and whatever we paid directly for dental and optometrist appointments, as well as prescription drugs.

That year, my family’s medical expenses just barely surpassed three per cent of my income, by $14 dollars or so, thanks to my company’s medical plan. And since my wife had no income, the credit was useless on her own tax return. The whole exercise hardly seemed worth the effort.

But what really angered me at the time was that a maximum threshold existed at all. No matter how much money one earned, the threshold would never go any higher once that maximum was reached. I felt like I was being ripped off. Couldn’t the law and policy makers see how unfair this was?

However, after seeing how much more tax is paid by the higher earners, I can understand now why it may make sense to give them a break when it comes to medical expenses. Besides, I have an idea that could be even more beneficial for households where only one partner is working. Medical expenses can be declared on the return of the partner with the lower income, and then any unused portion can be transferred to the other partner through Schedule 2, Amounts transferred from spouse or common-law partner. It would be a great way to recognize the impact of medical costs on the whole family.

Mind you, I had forgotten all about this one year when our out-of-province medical trips became so frequent that it would have made sense to keep the receipts from travels, motel stays and meals. They represented about $500 per trip and would have quickly reached and exceeded the threshold. Oh well, lesson learned.