Income Splitting

AAA

DEFINITION of 'Income Splitting'

A tax reduction strategy employed by families living in areas that are subject to bracketed tax regulations. The goal of using an income-splitting strategy is to reduce the family's gross tax level, at the expense of some family members paying higher taxes than they otherwise would.

INVESTOPEDIA EXPLAINS 'Income Splitting'

An example of income splitting is a higher income family member transferring a portion of his or her income to a lower income family member through some legal means, such as hiring the lower income family member and deducting the cost of the labor as a legitimate business expense. Although the family still earns the same amount of money, the overall amount of tax it must pay is reduced.

Another example is the transfer of tax credits from a lower income family member to a higher income family member. This can be done by transferring tuition credits from students to parents funding their children's post-secondary educations.

In Canada, an income-splitting technique can be used to reduce tax liability through RRSP contributions because money contributed to RRSPs is tax deductible. A higher income family member can contribute to a lower income family member's RRSP, thus lowering the higher income person's overall tax liability and potentially moving the higher income family member into a lower tax bracket.

RELATED TERMS
  1. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  2. Tax Credit

    An amount of money that a taxpayer is able to subtract from the ...
  3. Tax Shelter

    A legal method of minimizing or decreasing an investor's taxable ...
  4. Tax Shield

    A reduction in taxable income for an individual or corporation ...
  5. Regressive Tax

    A tax that takes a larger percentage from low-income people than ...
  6. Registered Retirement Savings Plan ...

    A legal trust registered with the Canada Revenue Agency and used ...
Related Articles
  1. Retirement

    Tax Breaks For Canadian Families

  2. Personal Finance

    Pros And Cons Of Offshore Investing

  3. Taxes

    Registered Retirement Savings Plans ...

  4. Whether you're a saver or a financial advisor who want to give their clients a leg up, these 8 tips are essential for financial planning.
    Investing Basics

    8 Essential Tips For Retirement Saving

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center