Define: Income-Shifting

Income-shifting refers to the practice of transferring funds to individuals with lower tax rates, such as children, in order to reduce tax liabilities. This strategy is often implemented through the establishment of a specialized trust known as a Clifford trust. Taxes, on the other hand, are monetary contributions collected by the government from individuals, businesses, and properties to fund essential services. While taxes are typically paid in currency, alternative forms of payment may also be accepted. Accrued tax denotes the situation where an individual has a tax obligation but has not yet settled it. The accumulated-earnings tax serves as a penalty imposed on companies that retain their profits instead of distributing them to shareholders as dividends. Lastly, an admission tax refers to the fee charged for entry into a specific event or venue.

Income-shifting refers to the strategy of transferring income to a taxpayer in a lower tax bracket, such as a child, in order to decrease tax liability. This is commonly achieved through the establishment of a Clifford trust. For instance, a parent may transfer ownership of a rental property to their child who falls into a lower tax bracket. As a result, the child receives the rental income and is subject to a lower tax rate compared to what the parent would have paid. This example demonstrates income-shifting as the parent transfers ownership of the rental property to their child with the intention of reducing their own tax liability. The child, being in a lower tax bracket, is then able to pay a lower tax rate on the rental income.

Tax, on the other hand, is a financial charge imposed by the government on individuals, entities, transactions, or property to generate public revenue. It encompasses duties, imposts, and excises. For instance, sales tax is a type of tax imposed on the purchase of goods and services. When you buy a new phone, a percentage of the purchase price is paid as sales tax. This example illustrates the concept of tax as the government imposes a charge on the purchase of goods and services, which is ultimately paid by the consumer in the form of sales tax. The revenue generated from sales tax is then utilised to fund various public services and programs.

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This glossary post was last updated: 17th April 2024.