Here are two examples of how income shifting helps clients pay for a child’s education:
Example #1: A student’s college expenses are $20,000 per year
In this case, the parents would need to earn more than $30,000 (assuming a 35% tax bracket) to pay the educational costs out of ongoing earned income. Alternatively, they may elect to sell an investment with a $20,000 long-term capital gain and contribute $5,000 of earned income. They would be left with a $17,000 gain on the sale after a 15% capital gains tax, and $3,200 of their income after ordinary income tax. So the parents would be left with $20,200 for educational costs after a $4,800 tax bill.
If instead, the parent paid the child the same $5,000 of wages and also gifted the appreciated asset to be sold in the child’s tax bracket, the tax would be essentially zero on the wages (standard deduction of $4,850) and only $1,000 on the capital gain in the child’s lower tax bracket.
So by having your clients use income shifting, you have saved them almost $3,700 in one year.