You may or may not have heard about the new income splitting plan the federal government passed at the end of October. A spouse in an eligible family will soon be able to transfer up to $50,000 of his or her income to a spouse in a lower tax bracket; the transferring spouse will then be eligible for a maximum $2,000 non-refundable tax credit. Tax issues can be notoriously tricky to navigate so here is a quick overview of the scheme, how it works, and whether or not you can benefit from it.
How Does It Work?
Very simply, income splitting is designed to establish fairness in the taxes paid between two families that have the same total income, but different incomes for each spouse. For example, if Family A had one income earner who was making $80,000 each year, and Family B had two income earners making $40,000 each year the net income of each household would be the same, but Family A would pay more tax. If the income earner in Family A was allowed to transfer some money to the spouse in the lower tax bracket then the taxes paid between the two families would be comparable.
Am I Eligible For This?
For most families the two hurdles you will have to clear to benefit under the scheme are that you must have a spouse or a common law partner, and the family must include at least one child who is under 18 years of age.
What Benefit Can I Expect?
If you’re eligible for the scheme then the benefit you will see is a non-refundable tax credit. This type of credit allows you to reduce or eliminate how much tax you will have to pay but any excess credit will not actually be refunded to you.
For example, if you owed $1,500 in taxes at the end of the year and were eligible for the $2,000 credit then your tax owed would be reduced to zero. However, the remaining $500 of the credit will not be refunded to you.
What If I’m Not Eligible?
Eligibility of families is one major critique of this scheme. It currently excludes single parents, families without children, and families with adult children. Unfortunately these families will not see any benefit.
If I’m Eligible, Will I Really Benefit From This?
Let’s say Family C is eligible for the scheme and has dual incomes of $45,000 and $55,000. Although there is the option to split the $55,000 income, at the end of the day it won’t make much of a difference or provide much benefit to the family. Family A on the other hand will be able to take advantage of the splitting option and the tax credit. The scheme has now made the taxes paid by both Family A and Family C comparable, but the circumstances of the families in terms of hours worked, working multiple jobs, child care, and other factors are likely very different.
Just Don’t Shoot The Messenger…
This scheme is far from perfect, but for better or worse it is here. If you can benefit from it now, or may become eligible in the future, be sure to take advantage of the tax credit in coming years. If you have any questions about how to take advantage of income splitting, contact our office at 250-763-4323 or via email at [email protected].