Tax season is upon us, and we all always hope that we will be receiving money back instead of paying (at least I know I do). We also try to do things throughout the year to help us save money on taxes, because we?d rather receive money than give it away. This is where income splitting can come in handy for families trying to save on taxes. Never heard of income splitting? Keep on reading and find out how you and your family can save some money on taxes.
Always a Hierarchy
Within the family someone is always going to be making more money than others, this might be by a huge margin or a small one. We all know that the one making more money is paying more in taxes. I believe we all know the phrase, ? The more you make, the more they take? ? that always makes me laugh a bit. If you happen to be at the top of the higher pay hierarchy in your family, and would love a tax break, than income splitting could be right up your alley.
So what exactly is income splitting?
As I have been talking about so far, some family members make more money then other and pay more in taxes. To help avoid this you can income split some of their/your pay. This happens by having a higher paid family member transfer some of their income to a lower paid family member.
For example, we have Shannon who is the highest paid family member and John, who makes a fair bit less than Shannon. So Shannon can help prevent being part of a higher tax bracket can transfer ?some of her income to John. The over all money stays within the household, but Shannon now makes ?less? thus gets charged less in taxes. This is done legally of course.
How it works.
Shannon, the highest paid family member would hire John to do some work for her, this could be a range of things. This would be considered hired labor, thus Shannon can deduct that amount as a legit expense related to business. Now Shannon made ?less? and John made ?more.? The money stays within the family, but now Shannon can catch some tax brakes if she happens to be borderline or just barely in a higher tax?bracket. Seems like its a win win for everyone. Hopefully Shannon actually lets John keep some of that money.
To wrap it up.
You have just learned a bit about income splitting, how it relates to you depends on your life situation.This may or may not work for every household. Not everything will be able to apply to you and your life. But knowing about things you can do to save money never hurt anyone. I am also not promoting in anyway to cheat the government or IRS, that is something you definitely do not want to do. There are legal and legitimate ways of helping you and your family save a little bit of money. Just remember to play it safe and keep it legal.
Photograph for the post by Shane Powers
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