If you have kids, you’re in for a nice surprise this tax season. Not only could the new Family Tax Cut put some extra cash in your pocket, it’s just one part of a larger family tax reform, and some great opportunities arise when they’re considered together. The enhanced Universal Child Care Benefit, for example, will pay a lump sum in July to all families with children under 18. A refundable Fitness Credit will become available for the 2015 tax year, as will an increase to child-care expense deductions. Put them together and young families are finally starting to get the tax breaks they desperately need. How much will you get? Read on to find out.
What is the Family Tax Cut? At its core, this tax break aims to slash the taxes paid by couples with children. If you don’t have children, or you’re a single parent, there’s no break for you, I’m afraid. But as long as you’re a couple, one or both of you earn a taxable income, you’re in different tax brackets, and you have a child under the age of 18 living at home, you’ll likely pay less tax.
Who’s eligible? Couples with children under 18 can claim the credit. If you get separated or divorced, you’re out of luck, unless you strike up a new common-law relationship or get married and you have at least one child living with you.
Single-parent families don’t qualify. Nor do unions where one spouse is confined to a prison or similar institution for 90 days or more in the year.
Making the claim Both spouses must file a tax return to get the Family Tax Cut, but either spouse can make the claim as long as you lived together in Canada at the end of 2014. If you’re filing your own return, I recommend using tax software such as UFile or TurboTax. That’s because four detailed federal tax calculations (two for each spouse) are required to claim.
How much will I get? In general, the bigger the difference in incomes between you and your spouse, the more you’ll get. At least until you hit the $2,000 cap. The Family Tax Cut works by allowing the spouse who makes the higher income to “transfer” income to the spouse who makes the lower income. This saves you money because the spouse with the higher salary is taxed at a higher rate. You can transfer up to half the difference in your taxable income, up to an absolute maximum transfer of $50,000. So if the difference between your salaries is $30,000, you could transfer up to $15,000 from the top earner. If the difference is $120,000 though, you hit the maximum and can only transfer $50,000.
Could my RRSP contribution reduce my Tax Cut? Maybe. The amount you get from the Family Tax Cut depends on the difference between your two incomes. So if the higher-earning spouse makes a big RRSP contribution, it could lower the taxable income used to calculate the Family Tax Cut, and lower the amount you get.
That presents a tricky scenario, as you’ll maximize your RRSP refund if the higher-earning spouse makes the contribution, while potentially lowering your tax cut.
Still, in most cases, the higher-earning spouse should still make his or her full RRSP contribution, even at the expense of the tax cut. That’s because it will reduce your net income, which affects the level of refundable and non-refundable tax credits the family is entitled to. See a pro for the projections or play with the numbers on a tax calculator (you can find a really good one at www.knowledgebureau.com).
Meet Joseph and Tamara. Putting the Family Tax Cut into practice can be complicated, so maybe an example will help. Joseph and Tamara are a young common-law couple with three pre-school kids. In 2014 Joseph earned $78,000 at work, and Tamara stayed home with the children. Her only income was the Child Tax Benefit of $3,197 (which doesn’t count as income in Family Tax Cut calculations) and the taxable Universal Child Care Benefit of $3,600. Before the cut, Joseph’s federal taxes were $9,597 and Tamara’s were nil.
The difference in their income is $74,400 ($78,000 – $3,600), so Joseph can transfer half of that, or $37,200, to Tamara. That reduces the tax he pays, and increases the tax she pays, but because Tamara is taxed at a lower rate than Joseph would have been, they come out $2,383 ahead. That’s more than the $2,000 cap, so they end up being able to claim the maximum, reducing their taxes by a total of $2,000.
What will you do with your refund? Many families were already getting refunds of $2,000 or more before the Family Tax Cut. This year those families could get $4,000 or more. In addition, come July, all families with children—taxable or not—will receive a lump sum of $360 per child under the age of 18 under the newly enhanced Universal Child Care Benefit.
What will you do with your refund? Will you invest it for your children’s future education? Pay off debt? Top up your RRSP or TFSA? Be sure to consider all opportunities to build a better future with the extra cash this new tax break affords.