With the 2012 instalment safely behind us, it's nice to relax knowing that it will be 10-12 months before we must again delve into bills, receipts and tax documents. For people who take an organized, proactive approach to maintaining their own personal taxes, April is a much less stressful month. Make a commitment to improving your tax season experience by making a small change or two relative to your current routine.
For some, this simply means saving more receipts or sticking to a practical system for filing papers. For others, this might mean devoting some time to learning more about the tax system in order to take advantage of savings that may have been missed out on.
In May, we mentioned income splitting as a tax-saving technique.
Let's examine a situation where you have a 19 year-old son who is working and still living at home.
Federal Income TaxEarned Income - Tax Bracket
$0 - $42,707 15% plus
$42,707 - $46,992 22% plus
$46,992 - $132,406 26% plus
$132,406 + 29%
By splitting your income, you can transfer a portion of your income to a lower-earning family member, for tax purposes, in order to pay a lesser amount of tax on that portion of income.
Example #1
Say you earn $100,000 and do no income splitting.
You are taxed 29% on $100,000.
You pay $29,000 in federal taxes.
Example #2
Say you earn $100,000 and your son earns $20,000. Through a family trust, you pay your son a dividend of $20000
You are taxed 29% on $80,000 and 15% on $20,000.
You pay $26,200 in federal taxes. Savings: $2,800
It is important to remember that you can only pay dividends to adult household members (spouse and children over 18 living at home). In this example, there is still more tax money to be saved by further splitting with the 19 year-old son.
Would an income split help save you money on your taxes?
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