Before your clients decide to start spending their anticipated new tax savings because of the federal government family friendly tax proposals introduced in October, you may want to sit them down to walk through how much more cash they will really have in 2015 as a direct result of the changes.
Of course, the cornerstone of the announcement that will put more money into the hands of families with children under the age of 18 is the much anticipated income splitting proposal.
Officially, it’s called the Family Tax Cut (FTC) credit and it’s actually a new federal non-refundable credit worth up to $2,000 for couples with children under 18, effective for the current and future taxation years. It’s calculated as the tax savings a couple could realize on the notional and purely theoretical transfer of up to $50,000 of income from one spouse or partner to the other and capped at a maximum benefit of $2,000.
That’s important for families to remember because it’s pretty different than true income splitting. Take the example of a high-income taxpayer who pays taxes at the top federal tax of 29% rate and who could shift $50,000 of income to a spouse who has no income. Assuming only the basic personal tax credit, the potential true theoretical income splitting savings could be about $6,600; however, with the FTC credit, it’s capped at $2,000.
The second area to inform clients about is the new, enhanced Universal Child Care Benefit (UCCB). This monthly, taxable benefit rises in 2015 to $160 from $100 a month for children under the age of six. In addition, a new benefit of $60 a month, or up to $720 annually for children aged six through 17 is added.
However, the enhanced UCCB is not a pure win as it will replace the existing Child Tax Credit (CTC). The CTC, which will be eliminated in 2015, is currently based on $2,255 per child at the 15% credit rate or $338 per child.
So, let’s say you have a client with two kids aged 11 and 13 who was counting on an additional $720 per child from the enhanced UCCB. Now would be the time to have a chat with that client and warn him or her not to go too crazy with this month’s holiday spending.
That’s because once you take the $720, subtract about 20% in taxes (as the amount is taxable to the lower net income spouse, who, for this example we’ll assume is in the lowest federal/provincial tax bracket) and then deduct the $338 loss of the CTC, the client is left with a mere $238 ($720-$144-$338) per child. Although this is nothing to sneeze at, it’s a far cry from the initial $720 per child announced in October.