Income Shifting

What Is Income Shifting?

Income shifting, otherwise called income splitting, is a tax planning technique that transfers income from high to low tax bracket taxpayers. It is likewise used to reduce the overall tax burden by moving income from a high to low tax rate jurisdiction.

Breaking Down Income Shifting

Presumably the most popular illustration of income shifting is the shift of unearned investment income from a high tax bracket parent to a low tax bracket child. Frequently this transfer is by a trust under the Uniform Transfers to Minors Act (UTMA) or as a gift under the Uniform Gifts to Minors Act (UGMA). These parent-to-child income shifts must now conform to the limitations of the kiddie tax enacted to curb this tax loophole.

High to Low Tax Bracket Income Shifting

Upper tax bracket, family business owners might shift income from business earnings distributions to low tax bracket family members by hiring these family members to work for the business and paying them salaries. The salaries are deductible as business expenses if reasonable in amount and for work performed.

Credits at no or below-market interest, deal leasebacks or gift-leasebacks, can likewise be helpful, as can disaster protection and annuity policies. These different vehicles are dependent upon the risk of imputed interest or gift reclassification.

Family business owners can utilize these income shifting tactics alone or in combination with income splitting to family restricted partnerships (FLPs). Thusly, the business owner transfers business assets to FLPs and afterward sell, gift outright, or in trust, FLP interests to lower tax bracket family members.

Income Shifting from Tax Inversion

Tax inversion is a conventional technique used to shift income from high to low tax jurisdictions. People achieve tax inversions by transferring income-delivering assets to non-grantor trusts formed and dwelling in low tax states. Businesses may likewise accomplish tax inversions by converging with foreign companies in low tax rate countries and afterward parking earnings offshore. Instances of inversion to seaward, low tax countries incorporate Apple, Nike, and Pfizer.

Worldwide undertakings (MNEs) further reduce taxes by shifting income locally to their lower tax rate geographical business areas or offshore by making sales at transfer prices or by factoring receivables to their low tax rate foreign offshoots.

Highlights

• Income shifting is additionally alluded to as income splitting.
• This tax planning technique helps transfer income to lower tax brackets.
• One common illustration of income shifting will be shifting unearned investment income from a parent to a child.