Smart Tax Strategies for Retirees: Keep Track of Health & Medical Expenses

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Smart Tax Strategies for Retirees: Keep Track of Health & Medical Expenses

Unfortunately, as you age, you may have increased health care and medical costs that are not paid for by the government.

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A smart tax strategy during retirement is to keep track of your medical expenses and take advantage of any credits that may be available.

Common expenses that may be tax deductible are personal health care plans, prescription drugs, hearing aids, mobility aids, and some of the costs if you live in a nursing or retirement home.

Some of the credits you may be entitled to are:

What is a tax credit?

A tax credit is a non-refundable item that reduces the amount of tax that is owed, whereas a tax deduction reduces your taxable income.

Key Tax Credits to Review

1. Medical Expenses – Tax Credit

Some of the medical expenses that you may be able to claim include:

  • Prescription drugs
  • Personal health plans
  • Medical treatments not covered by provincial plans
  • Hearing and vision aids
  • Mobility aids
  • Some renovations for mobility-related aids
  • See the CRA website HERE for a full list of expenses.

You can claim medical expenses for you and your spouse/common law partner (CLP) for any 12-month period that ends in the tax year.

How does it work?

Unfortunately, you don’t get to use the entire amount of expenses as a deduction; however, a certain amount may qualify for tax credit.

The steps are:

1. Add up your expenses (best 12-month period)

2. From your expenses, deduct the lessor of 3% of your income, or $2,421 for 2021.

3. The tax credit is 15% of the above.

Example:

  • So, if your income in 2021 is $60,000, and your expenses were $3000.

1. $3,000 of expenses

2. 3% of $60,000 = $1,800 and this is less than the base of $2,421

  • $3,000 of expenses minus $1,800 = $1,200

3. Your tax credit is $1,200 times 15% = $180

The lower income spouse/CLP may have a lower threshold and may be able to claim more expenses. Fortunately, your accountant will be able to do the calculations for you as they can be complex, especially if you live in a retirement or nursing home as there are special rules.

2. Disability amount

As you age, if you, your spouse/CLP, or your dependent have a severe and prolonged impairment and meet certain conditions, they may be eligible for the disability tax credit (DTC). For example, Alzheimer’s would qualify for the Disability Tax Credit.

To determine eligibility, you must complete Form T2201, Disability Tax Credit Certificate and have it certified by a medical practitioner.

In 2021 the disability amount was $ 8,662, and this would reduce your tax owing by $1,299.30 (15% tax credit).

If you or your spouse/CLP live in a nursing home, you may want to apply for the Disability Tax Credit, and if you live in a retirement home, you may wish to review to see if you qualify.

3.The Canadian Caregiver Credit

If you support your spouse or common law partner who has a physical or mental impairment, you may be eligible for the Canadian Caregiver Credit.

The maximum you can receive in 2021 is 15% of $7,348 as a credit. ($1,102.20). There is an income threshold you will have to review.

Jack Lumsden

4. Home Accessibility Expenses

These are renovations that allow the individual to be more mobile and functional within the home, and/or reduce the risk in gaining access to the home.

To qualify for the home access credit, you must be age 65, and eligible for the Disability Tax Credit.

A maximum of $10,000 per qualifying individual can be claimed per dwelling. You will need supporting documents, and be sure to review what expenses may be eligible.

5.Seniors' Home Safety Tax Credit

The Ontario budget proposes that starting in 2021, a refundable tax credit is available that is worth up to 25% of $10,000 of eligible expenses to make homes safer and more accessible.

You must be age 65 by the end of 2021 or live with someone who is.

The improvements would have to be towards the principal residence, and there is no income test to receive.

Sample examples:

  • grab bars and related reinforcements around the toilet, bathtub and shower
  • wheelchair ramps
  • stair lifts
  • elevators
  • renovations to permit first floor occupancy or a secondary suite for a senior

(Source: HERE)

Be sure to review what may qualify before starting renovations.

Summary

It is important to let your accountant know about your medical expenses and review your situation with your financial advisor every year. Your accountant will be able to maximize your credits for you.

Jack Lumsden, MBA, CFP, is a Financial Advisor with over 20 years of experience, who has enjoyed building a strong career and loyal client base. He focuses on those who are or will be making the transition from their working years to retirement, with the need to develop a lifelong income and cash-flow strategy from the financial assets they have accumulated.

Jack Lunsden