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Family Tax Cut Explained

Due to the current election, there has been a lot of debate about the value and validity of income splitting opportunities. Stern Cohen’s tax specialists have put their heads together and come up with an easy to read explanation of how the family tax cut works, who might benefit from it, and exactly how much of a benefit it offers.

Also Known As:

The “income splitting” tax credit that might save you up to $2K of tax.

The Details:

The Family Tax Cut is a federal non-refundable tax credit that allows eligible two parent families with children under the age of 18 to transfer up to $50,000* of taxable income to an eligible spouse or common-law partner. The maximum cash value of the credit is $2,000.

As the Family Tax Cut is a federal tax credit only the federal tax brackets are considered. Since the federal tax brackets are wide, sometimes spouses with income discrepancies of up to $49,000 can be in the same tax bracket and therefore receive nothing from this credit.

The 2015 Federal Tax Brackets:

Tax Bracket Federal Tax Rate
$0 $44,701 15%
$44,702 $89,401 22%
$89,402 $138,586 26%
$138,587 And above 29%


Real World Examples:

We’ve included some examples below to illustrate who might benefit from this credit.

Example 1 – Two income family with $40,000 income disparity
One parent earns $85,000 while the other parent earns $45,000. As both parents are in the same federal tax bracket the credit will be worth $0.

Example 2 – Single income family
One parent earns $100,000 while the other stays at home earning $0. Maximum $2,000 credit can be received by transferring $50,000 of taxable income from the first parent to the second parent.

Example 3 – Two income family in different tax brackets
One parent earns $70,000 and the other parent earns $30,000. This family receives a tax credit of $1,029 by transferring the maximum $20,000 (see Note 1) of taxable income from the first parent to the second.

The Takeaway:

As demonstrated in the examples above, the Family Tax Cut credit will have the most impact on two parent families with a single source of income or parents in different federal tax brackets. Where both parents are in the same tax bracket, despite a potential $40,000 income disparity, they will receive no benefit from this credit.

For more information about taking advantage of tax credits, contact a Stern Cohen tax specialist.

Notes:

*The maximum income that can be transferred is lesser of:

  1. 50% x (High income earning spouse’s income less second spouse’s income); and
  2. $50,000

For example if Spouse 1 earns $30,000 and Spouse 2 earns $70,000. The maximum income available for transfer is the lesser of:

  1. 50% x ($70,000 – $30,000) = $20,000
  2. $50,000