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Making "Cents" of the Family Tax Cut

03/11/2015 08:42 EDT | Updated 05/11/2015 05:59 EDT
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More than half of Canadians know of the tax law changes, but 85 per cent don't expect them to impact their refund.

Last October, the government announced a number of tax law changes to help give tax relief to families with kids under 18. And though the new tax law message is being advertised by the government, only 15 per cent of Canadians expect the changes to impact their tax returns this year, according to a recent survey.

One of the biggest changes for the 2014 tax year is the new Family Tax Cut, which seems to be causing some confusion. The recent survey, conducted by Leger on behalf of H&R Block Canada, found that about a quarter of Canadians surveyed recognized that single-income families would benefit the most from this credit. When asked to identify other beneficial scenarios from the Family Tax Cut the results were poor.

Part of the problem is the Family Tax Cut depends on marginal tax rates or tax brackets, which can be one of a tax return's more confusing elements. Of course, not all income is taxed equally--the more earned, the higher the tax rate. Everyone is allowed the personal exemption amount of $11,138 federally before they start owing income tax, then the tax rate climbs through different brackets.

Canadians earning $40,000 in 2014 will pay 15 per cent federal income tax. But once your income goes above $43,953, the income above that level enters another tax bracket. Those earning $75,000 pay 22 per cent tax on any income over $43,953. A common misconception is that once you enter a new tax bracket, you pay the higher increased rate on all of your income. That is not true.

Understanding tax brackets is the key to understanding the Family Tax Cut. Even a small disparity in income between spouses can result in savings through the new credit. So don't assume that because both parents have income that you don't qualify.

Take the example of one spouse who earns $50,000 per year while the other earns $40,000: the Family Tax Cut would still result in tax savings of $277. Surprised? Only 10 per cent of Canadians we surveyed knew this would qualify. It does, because the two have income in different tax brackets, so can save by moving some income from the higher earning to the lower earning spouse.

Income disparity alone does not determine Family Tax Cut savings. For example, if one spouse earns $80,000 per year and the other earns $50,000, there is no savings from the credit even with a $30,000 difference in income. Since both of the spouses are in the same tax bracket, moving money to the lower-income spouse results in no tax savings.

Assuming you don't qualify for a tax credit or deduction is one of the biggest tax mistakes you can make this year. Some of my clients have expressed concern that the Family Tax Cut will affect other benefits, such as the spousal amount. But the way the credit is set-up, the income is never actually transferred between spouses. Calculations are done on a separate schedule based on what would happen if income were transferred. It is only notional income splitting so it does not affect anything else on the return.

Families should also file to claim the increased Children's Fitness Tax Credit. And, if you are not already registered for child benefits, make sure you fill out an RC66 Form -- Child Benefit Application with the so you can start receiving the enhanced Universal Child Care Benefit for children under 18.

Recent tax law changes may mean you have to pay less income tax, so take full advantage of any you can. Even if you don't qualify for the $2,000 maximum, the Family Tax Cut could put a few extra dollars in your pocket this year. No one wants to pay more in taxes, so don't miss out.

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