The Family Tax Cut (FTC) is the big news in family tax filing this year. That’s because your family may receive a refund that is up to $2000 bigger. But the provisions are complex, so we have put together a brief overview to help you get started.
First, some bad news. Families where both spouses earn income can only expect to tap into the FTC if each spouse is in a different tax bracket. The benefit will increase with the spread between incomes up to the maximum spread of $50,000 or the maximum credit of $2,000, whichever comes first.
Now the good news: for a single-earner family, the FTC will reduce family taxes when the higher-income earner’s taxable income is over a figure of about $45,000. The reduction gradually increases until the higher-income earner’s taxable income reaches about $73,000, when the FTC reaches its maximum dollar benefit of $2,000.
There will be other effects of the FTC when you file your return, too. Before its introduction, using an RRSP to reduce the income of the higher-income spouse would result in a tax savings equal to the contribution amount multiplied by contributor’s marginal tax rate.
Using the RRSP is still a good plan, but the FTC can reduce the benefit of the contribution, since its value is affected by the contribution as well.
Getting the most from deductions like child care or moving expenses also requires review. What’s important to note in the case of the moving expenses is that the claim by the higher-income earner is not always the best claim.
If credits claimed by the higher-income spouse exceed the “Adjusted Taxable Income” (the income after splitting in the FTC calculation), the benefit of the credit is lost. All efforts should be made to either postpone some of the credits (e.g. charitable donation or student loan interest) or have the credit claimed by another family member (e.g. transfers of the disability or tuition, education, and textbook amounts from a dependant.)
The moral of the story is that the FTC will change how tax deductions and credits work. Knowledge Bureau has developed a great new Income Tax Calculator that can easily show you how to benefit. A free trial copy is available at knowledgebureau.com.
Written by Evelyn Jacks, President of Knowledge Bureau. Knowledge Bureau is a national post-secondary educational institute and financial publisher headquartered in Winnipeg.