Tax Planning for Parents

Are you a parent? 

If yes – you’re probably paying a lot more tax.

Parents are often in higher tax brackets than non parents.

This means your planning must be diligently looked at, as it can affect your RRSPs, deductions, and more.

I’ve talked about this topic before on my blog, but this is the updated version.

In my latest YouTube video and podcast episode you’ll learn:

• Why are effective tax rates higher for parents?
• Does the higher tax bracket for parents really start at only $17,000?
• How does the Canada Child Benefit (CCB) work?
• Why is the CCB clawback a game-changer for your tax planning?
• What are the benefits and how much is the clawback?
• What tax rates apply for parents?
• Why do parents benefit more from RRSP contributions?
• Why do parents benefit more from the Smith Manoeuvre?
• Why should parents avoid dividend-paying stocks?
• How does staying home with your kids affect your tax?

Why are effective tax rates higher for parents?

• Parents can get a generous Canada Child Benefit (CCB)
• But it is also a large tax increase for parents.
• The CCB is clawed back based on your income.
• This clawback is effectively higher tax.
• You pay to the government based on your taxable income.

 How does the Canada Child Benefit (CCB) work?

• Benefit of $7,437/year for each child under 6.
• Benefit of $6,275/year for each child age 6-17.
• Clawed back at 7-23% starting at family income of $34,863.
• Clawback starts at only $17,432 for a couple with equal incomes.
• Clawback applies if your family income is <$220,000-$290,000. 

Why is the CCB clawback a game-changer for your tax planning?

• It can put you in a high tax bracket with income of only $35,000.
• For a couple, your high tax bracket can start at only $17,000.
• Makes RRSP contributions worthwhile at much lower income.
• Makes staying home with the kids easier.

Gives you higher tax savings for tax deductions:

• RRSP contributions.
• Smith Manoeuvre interest deductions.
• Any other tax deduction.

What tax rates apply for one parent?

What tax rates apply for 2 parents?

Why do parents benefit more from RRSP contributions?

When are RRSP contributions generally worth doing?

It’s hard for modest income parents to contribute to RRSP. But very worthwhile!

Why do parents benefit more from the Smith Manoeuvre?

• All tax deductions save you more tax as a parent.
• Interest deductions give larger tax savings for parents.
• Get larger CCB (smaller clawback).
• Kids are expensive. Parents often find cash flow tight.
• Smith Manoeuvre: Invest for your retirement without using your cash flow.

 Why should parents avoid dividend-paying stocks?

• Clawback of 3%-23% applies on gross-up dividend.
• Clawback is 38% more on Canadian dividends than other income
• Clawback often much larger than tax on dividend.

 How does staying home with your kids affect your tax?

• Lose your income, but possibly avoid day care.
• Staying home gives you a larger CCB & a spouse tax credit.
• Couple earning $50K & $75K. Spouse earning $50K stays home.

What you learned:

• Why are effective tax rates higher for parents?
• Does the higher tax bracket for parents really start at only $17,000?
• How does the Canada Child Benefit (CCB) work?
• Why is the CCB clawback a game-changer for your tax planning?
• What are the benefits and how much is the clawback?
• What tax rates apply for parents?
• Why do parents benefit more from RRSP contributions?
• Why do parents benefit more from the Smith Manoeuvre?
• Why should parents avoid dividend-paying stocks?
• How does staying home with your kids affect your tax? 

Ed