In this article, you will find 5 year-end tax-deduction strategies that apply if you’re getting married or divorced, have children who did or could work in your business, and/or have situations where you give money to relatives or friends.
STRATEGY 1 Put your children on your payroll
If your children helped you in your business this year, you should pay them for their work, and pay them on a W-2.
Wages paid by parent to their under-age-18 child: for work done in parent’s Schedule C business or LLC taxed as a sole proprietorship or spousal partnership are both:
- deductible by the employer-parent and
- exempt from federal payroll taxes for both the parent and child
Thus, in one of the above situations, you pay no federal payroll taxes on the child’s W-2 wages, the child pays no payroll taxes and your child pays no income taxes on income up to $12,400 by using their standard deduction.
If you operate as a corporation, your child and the corporation pay payroll taxes. The benefits of this strategy are reduced, but not eliminated.
Your child can also contribute to either a tax-deductible IRA or a Roth IRA. These monies can later be used for college expenses or ???
The money paid to your children stays in the family and also saves you money on payroll taxes.
KEYPOINT Pay the wages on a W-2. If child is paid on a 1099, they will owe self-employment taxes on the 1099 income.
STRATEGY 2 – Get divorced after December 31
In most cases, filing joint will work to your advantage because you are considered married for the year if you are married on the last day of the year. Think twice about filing separate as that usually results in increased taxes.
To be sure which scenario is best for you, you should have your tax person run the numbers both ways. It is an inconvenience but it could save you money.
STRATEGY 3 – Get married on or before December 31
Getting married before the end of the year usually works to your advantage because, just like in Strategy 2, you are considered married for the whole year if you are married on the last day of the year.
Again, run the numbers both ways to be sure of the tax detriments and benefits in your particular case.
STRATEGY 4 – Stay Single to Increase Mortgage Deductions
Two single people can deduct more mortgage interest than a married couple. If you own a home with someone other than your spouse and you bought it before Dec. 15, 2017, you individually can deduct mortgage interest on up to $1 million of a qualifying mortgage. Combined, you can deduct the interest on a $2 million qualifying mortgage. If married, the ceiling drops to $1 million.
If you bought your home after December 15, 2017, then the mortgage limit is reduced by the TCJA to $750,000 for a single person or $1.5 million for 2 single people on the same mortgage.
STRATEGY 5 – Make use o the 0% tax bracket
If you give money to your parents or other loved ones, this strategy can work for you.
If your loved one is in the 0% tax bracket for capital gains, which would apply if they were single and made up to about $40,000 or $80,000 if they file jointly, then you can get extra benefits for your gift if you give these people appreciated stock rather than cash.
Example: You give your parents shares of stock with a fair market value of $20,000 for which you paid $2000. Your parents sell the stock and pays zero in capital gains taxes. She now has $20,000 in after-tax cash to spend.
Had you sold the stock, you would have paid taxes of over $4000 assuming a 22% tax bracket.
Your parents get money you would have given them anyway and you avoid $4000 in taxes.
We hope that our clients being aware of some of these strategies can lead to tax savings in the current year or some future year.
AFS – our employees spend dozens of hours each year in continuing education, keeping up with changes in the tax code and learning the specifics that lead to tax savings strategies for our clients.