11th hour series- Tax strategies for the spouse and kids
Tax Strategies for Marriage, Kids, and Family
If you have children 18 or under and have a proprietorship or partnership, there are savings to be had by placing your child(ren) under your employment.
This goes for corporations as well, don’t leave these savings on the table.
Here are 5 strategies that apply to possible savings for your business, from getting married or divorced, to placing your child(ren) to work, and/or situations where you give money to relatives and friends.
1. Put Your Children on Your Payroll
Did your children 18 or under? Where they helpful to you in your business this year? How did you pay them for their work? You should pay them for the work—and pay them on a W-2. Here is why:
#1: W-2 wages paid by the parent to the child for work done on the parent’s Form 1040 Schedule C business are both
- Deductible by the employer-parent, and
- Exempt from federal payroll taxes for both the parent and the child.
So, if you operate your business as a sole proprietorship or single-member LLC taxed on Schedule C or as a spousal partnership, you have no federal payroll taxes on the W-2 wages you pay your child. (And in most states, you also face no state payroll taxes.)
If you operate as a corporation, your child and the corporation pay payroll taxes. But that does not eliminate the benefits; it simply reduces them.
#2: Thanks to tax reform, your child can use the 2021 standard deduction to eliminate income taxes on up to $12,550 in wages. (Say WHAAAAAT!)
#3, Your child can contribute up to $6,000 to either of the following:
- A tax-deductible IRA, which allows a deduction of that amount from taxation. It’s the best way to get tax-free money, especially for their W-2 is for more than $12,550.
- A Roth IRA, which is not tax-deductible, but the child can
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- Remove the money put in at any time, tax- and penalty-free
- Remove the earnings tax-free after age 59 1/2. This is the best strategy if your child earned less than $12,550 on their W-2.
Something of note: To avoid payroll taxes, wages must be paid on a W-2.
Corporations:
If you operate as a C or an S corporation, the corporation does the hiring; therefore, both your corporation and your child pay payroll taxes. This is not a deal breaker for the strategy, but it does reduce the net family benefit. (Sorry)
2. Getting Divorced after December 31 (hahaha we are not joking)
The marriage rule works like this: you are considered married for the entire year if you are married on December 31.
In most cases the joint return will work to your advantage. Although, some laws are evening the paying field between married and single tax filers. Thus, it may be better to wait until next year to finalize the divorce.
However, the only way to know the benefits of being married before or after December 31 is to run the taxes in a before and-after scenario.
Shameless plug: That is where a kind and patient bookkeeper comes in handy! Contact us
Warning on alimony! The Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018:
- Old rules: Alimony was a deductible and income situation.
- New rules: if divorced after December 31, 2018, alimony is neither a deduction for the payor or income for the payee.
3. Stay Single to Increase Mortgage Deductions 
Can you believe, two single people can deduct more mortgage interest than a married couple, (Say what now?)
If you own a home with someone other than a spouse and you bought it on or before December 15, 2017, you individually can deduct mortgage interest on up to $1 million of a qualifying mortgage.
Example: say you live with your partner and own a home you each deduct the mortgage interest, up to $2 mill. Married it drops to $1mil.
If you bought your house after December 15, 2017, the max for two people is $1.5mil and married $750K.
4. Get Married on or before December 31
I know we just talked about divorce, well, this is if you aren’t married. If you get married on December 31, in the eyes of the IRS this counts for the whole year.
Therefore, getting married in 2021, fall under the same reasons as staying married in 2021. The IRS could have big savings available to you for the 2021 tax year if you get married on or before December 31, 2021.
Again, you have to run the numbers to determine what is best for you and your partner. A quick trip to the courthouse may save you thousands.
Shameless plug: Please see the previous shameless plug!
5. Make Use of the Zero Percent Tax Bracket
Ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?
If yes, is your loved one in the 0 percent capital gains tax bracket?
What is the Zero tax bracket this year you ask? For a single person with less than $40,400 and a married couple with less than $80,800 in taxable income.
Here is how you can both win: Say instead of paying Tia Maria in cash you give her shares of stock with a fair market value of $20,000, for which you paid $2,000. Tia Maria sells the stock, paying 0 capital gains taxes. Tia now has $20,000 in after-tax cash to spend. And you saved $4,284 in taxes but not selling the stock yourself.
Something of note: Of course, $5,000 of the $20,000 you gifted goes against your $11.7 million estate tax exemption (if you are single). Married and you made the gift together, you have a total of $30,000.
Shameless plug: (3rd one today wow I’m on a roll here) does all this sound tedious, boring or just plain overwhelming? Contact us! we can help you sort through it all.