Income Shifting Strategies in 2025: How to Lower Your Tax Burden Effectively

Julia Kagan, a seasoned financial journalist and former senior editor at Investopedia, offers insights into income shifting strategies.

Understanding Income Shifting in 2024

Income shifting, often called income splitting, is a strategic tax planning approach that reallocates income from taxpayers in higher tax brackets to those in lower brackets. This technique also involves relocating income to jurisdictions with lower tax rates to reduce overall tax obligations.

Key Insights

• Income shifting is synonymous with income splitting.
• This strategy helps taxpayers reduce their tax burden by transferring income to lower tax brackets.
• A common practice includes transferring unearned investment income from parents to children.

How Income Shifting Works

A classic example involves parents transferring unearned investment income to their children, typically through trusts established under the Uniform Transfers to Minors Act (UTMA) or gifts under the Uniform Gifts to Minors Act (UGMA). However, these transfers are subject to the kiddie tax rules designed to prevent tax avoidance.

Shifting Income Within Families

Family business owners in higher tax brackets can reduce taxable income by employing lower-taxed family members and paying them reasonable salaries deductible as business expenses. Additionally, strategies such as no or below-market interest loans, sale-leasebacks, gift-leasebacks, and utilizing life insurance or annuity policies can facilitate income shifting, though they carry risks like imputed interest or gift reclassification.

Combining these tactics with income splitting through family limited partnerships (FLPs) allows business owners to transfer assets to FLPs and subsequently distribute interests to relatives in lower tax brackets, optimizing tax efficiency.

Income Shifting Through Tax Inversion

Tax inversion remains a prevalent method for moving income from high-tax to low-tax jurisdictions. Individuals may transfer income-generating assets to non-grantor trusts in states with favorable tax laws, while businesses often merge with foreign entities in low-tax countries to shift earnings offshore. Notable corporations like Apple, Nike, and Pfizer have employed such strategies.

Multinational enterprises further minimize tax liabilities by shifting income domestically to lower-tax regions or offshore by setting transfer prices and factoring receivables to their foreign affiliates in low-tax countries.

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