Income Spreading

Definition of 'Income Spreading'


A tax reduction strategy that is typically used by people with highly volatile incomes to reduce the overall marginal tax rate paid on a large sum of income. This strategy involves particularly large sources of income and dividing the amount realized over a period of years in order to reduce the overall amount of taxes paid.

Investopedia explains 'Income Spreading'


Professional sport stars and actors in the entertainment industry are examples of people who may want to employ some sort of income-spreading strategy in order to smooth out the volatility of their income streams.

Another use of non-retirement related income spreading in Canada is to place a portion of income into an RRSP and then withdraw the amount when the person decides to return for more schooling. Because RRSPs do not penalize people for withdrawing funds early if they are used for educational purposes, a person would effectively be paying less tax on the sum because, as a student, the person's marginal tax rate would be lower.



comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific benchmark, such as a SPDR. Unlike actively managed ETFs, passive ETFs are not managed by a fund manager on a daily basis.
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
Trading Center