Last-Minute Tax Strats for Kids, Family and Marriage

The end of the year is approaching, so now is the time to utilize last-minute strategies to lower your tax bill. Here are four tax-deduction strategies that apply if you are getting married or divorced, have children who did or could work in your business, and/or have situations where you give money to relatives and friends. We believe you will find one or more of the strategies helpful in your year-end planning.

Put Your Children on Your Payroll

If you have children under age 18 who helped you in your business this year, make sure you pay them for their work and give them a W-2. You get a business deduction for the wages paid to your child. And if you operate as a sole proprietor, the wages are exempt from federal payroll taxes for both you and your child.

Your child can use the 2016 standard deduction to eliminate income taxes on up to $6,300 in wages, in addition to contributing up to $5,500 to a tax-deductible IRA. That means for you, as a sole proprietor in your 40 percent tax bracket,

you can pay your child $11,800 and save $4,720 in federal taxes, and

your child pays zero federal taxes on the income.

If you operate your business as a C or an S corporation, both your corporation and your child pay payroll taxes. This is not a deal breaker for the strategy, but it does reduce the tax savings.

Consider Getting Divorced After December 31

Tax law tends to provide more benefits to married couples. And you are considered married for the entire year if you are married on December 31. If you are getting divorced soon, it may make sense to run the 2016 numbers as both a married and a single taxpayer to see what the difference is. This allows you to see the true impact of getting divorced before or after December 31.

Consider the Impact of Getting Married by December 31

If you are getting married soon, consider the impact on your taxes if you get married before year-end. There are both pros and cons to getting married by December 31.

One big disadvantage to getting married by year-end is in regard to the mortgage. The rules on home mortgage interest deductions recently changed.

Now, if you own a home with someone other than your spouse, you individually can deduct mortgage interest on up to $1.1 million of a qualifying mortgage. So if you and your friend live together and own the home together, the mortgage ceiling on deductions for the two of you is $2.2 million. But if the two of you get married, the ceiling drops to $1.1 million.

On the other hand, there are several other big savings that the IRS makes available to you if you are married on or before December 31, 2016.

You have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. If marriage is in your plans, give me a call so I can run the numbers for you.

Make Use of the 0 Percent Tax Bracket

A single person with less than $37,650 in taxable income and married couples with less than $75,300 in taxable income pay 0 percent capital gains tax. If you give money to your parents or other loved ones to make their lives more comfortable, and they qualify for the 0 percent tax bracket, you can use this to your advantage.

Example. You give your aunt shares of stock with a fair market value of $10,000, for which you paid $1,000. Your aunt sells the stock and pays zero capital gains taxes. She now has $10,000 in after-tax cash to spend. Had you sold the stock, you would have paid taxes of up to $2,142 (23.8 percent times $9,000 gain).

 

Sources:

  1. Internal Revenue Code Section 3121(b)(3)(A)
  2. Rev. Proc. 2015-53
  3. Internal Revenue Code Section 219(b)(5)(A) Internal Revenue Bulletin: 2015-46
  4. Internal Revenue Code Section 152(c)(3)(A)(ii)
  5. Rev. Proc. 2015-53
  6. Internal Revenue Code Section 2503, Internal Revenue Code Section 2010, Rev. Proc. 2015-53

 

 

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