Income Splitting

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.

BREAKING DOWN '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. Family Offices

    Family offices are private wealth management advisory firms that ...
  2. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  3. Immediate Family

    A person's smallest family unit, consisting of the closest relatives, ...
  4. Attribution Rules

    A set of rules created by Canada Revenue Agency (CRA) that prevents ...
  5. Federal Tax Brackets

    Income tax groupings specified by the Internal Revenue Service ...
  6. Marginal Tax Rate

    The amount of tax paid on an additional dollar of income. The ...
Related Articles
  1. Markets

    Has Nepotism Ever Worked?

    It may very well be that hiring a relative is the right course of action for you. But before you do, carefully consider how hiring family could hurt your business.
  2. Financial Advisor

    How Advisors Can Appeal to Nontraditional Families

    So-called traditional families represent less than 20% of U.S. households today. Here's how advisors can adjust.
  3. Personal Finance

    Why Your Tax Bracket Is Not the Tax Rate You Pay

    Understanding how federal and state tax brackets work is important for tax planning – and for making sense of the political conversation around tax reform.
  4. Retirement

    Tax Breaks For Canadian Families

    Canadians have a lot of advantages when it comes to family tax perks.
  5. Personal Finance

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  6. Insights

    Top 25 Richest American Families

    Find out who America's wealthiest clans are. Number 3 may give you a stomach ache.
  7. Managing Wealth

    Family Philanthropy: Developing a Cohesive Strategy

    Devising a cohesive family philanthropy strategy requires proper goal alignment, planning, management, procedural rules and constant evaluation.
  8. Personal Finance

    How to Lend Money to Family and Not Regret It

    It’s hard to refuse a family member’s request for a loan, but be sure to go into such arrangements with your eyes open.
  9. Financial Advisor

    Federal Tax Brackets

    Why do we have income tax brackets? What do they do for us? Read this to understand the basics and where to find your own bracket.
  10. Personal Finance

    How Are Capital Gains And Dividends Taxed Differently?

    Individuals in the 25% or higher tax bracket pay a 20% tax on long-term capital gains.
RELATED FAQS
  1. Is there a tax free way to combine several mutual fund families into one mutual fund ...

    Over the last 30 years, I invested in 6 mutual funds scattered among 3 fund families. Is there a tax-free way to combine ... Read Answer >>
  2. What is the difference between income tax and capital gains tax?

  3. What is a family Limited Liability Company (LLC)?

    Learn about family limited liability (LLC) companies and why they are useful tools in the United States to protect family ... Read Answer >>
  4. Can moving to a higher tax bracket cause me to have a lower net income?

    Many people think that when their income increases by enough to push them into a higher tax bracket, their overall take-home ... Read Answer >>
  5. What is the income breakdown for the effective tax rate?

    Read about the effective tax rate, how the marginal income tax brackets affect it and how the denominator in its formula ... Read Answer >>
  6. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center