One software maker has jumped into the lead in serving an important segment of tax filers – senior couples.
Dr Tax Software Inc. has updated its UFile software and online tax preparation service to include a tool that will suggest exactly how much eligible pension or other retirement income to split with a spouse in order to save the most tax.
The opportunity to split income from an employer-sponsored pension plan at any age, and from other qualifying retirement income from age 65, was big tax news for 2007 but complicated to program into software.
Dr Tax says it has now succeeded, and H&R Block will use a version of the Canadian company's software to power its online tax preparation service, although not its tax preparers' workstations.
Left behind are Intuit Canada, the maker of the top-selling QuickTax software, and other suppliers to the home market. They merely boast visual tools that give taxpayers instant feedback on the impact of choosing to split different amounts of retirement income, as do the makers of FutureTax and TaxFreeway. Others require users to flip to a different page to check results of a change of amount.
Some taxpayers may still prefer the advice of a professional tax preparer or financial planner.
But, in terms of convenience and precision, the UFile MaxBack function beats other consumer software hands down.
It will simultaneously propose the amount of pension income to split, and suggest how to allocate other transferable tax credits or defer claims to ensure no non- refundable tax credits go to waste.
"This is done through the calculation of a baseline amount of zero transfer, then a second calculation at 50 per cent, which is the maximum portion of eligible income that may be transferred," explained Joanne Birtch, vice-president of marketing for Dr Tax.
"A series of other calculations is done down from 50 per cent until the amount of tax payable starts to rise again. It may sound time-consuming but, thanks to fast processors, it can be done in a heartbeat."
I tested UFile using the example of a man who received $36,000 from an employer pension plan, $7,000 from the Canada Pension Plan, $1,100 from a part-time job and $1,000 from bank interest. His spouse received only a $10,000 CPP disability pension and qualified for the near $7,000 disability tax credit.
I assumed the husband received an inheritance in 2007 that permitted him to contribute $15,000 to their retirement savings plans, make a $4,000 charitable donation and do a kitchen renovation that included $3,000 worth of special features to accommodate his wife's disability and perhaps qualify as a medical expense.
Some rival software merely indicated the husband could split half of his pension, or $18,000. UFile suggested $10,019.54. It's hard to imagine anyone having the patience to be so precise with other software.
With all of the couple's tax credits, including an extra pension income credit for the wife, the program calculated neither partner would owe any income tax this year. The partners would save a total of $499 compared with not splitting pension income.
The software surprised me by allocating $2,725.72 of the $4,000 charitable donation to the husband and $887.78 to the wife, leaving $386.50 to be claimed in 2008. Again, those figures would be difficult to find by trial and error. The traditional rule of thumb would suggest one spouse claim all of the charitable donations.
James Daw, CFP, appears Tuesday, Thursday and Saturday. He can be reached at firstname.lastname@example.org