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Last Minute Family Tax Strategies to Use Before 2020
Not to be cold-hearted at the beginning of winter but did you know there are savings to be had if you think about a little tax before the end of the year?
Just think if you give some money to family or friends for Christmas you can use some of the strategies below so you can pay fewer taxes and so too does your family.
If you have kids under the age of 18. It might be time to consider putting them on your payroll.
So we’ve put together some last-minute year-end strategies for marriage, kids and family which you can put in place before 2019 is over.
Free Ebook: Grab the Big Fat List of Small Business Deductions: Save money throughout the year with the Big Fat List of small business tax deductions. Use it as a reference all year round to save big at tax time.
Hire Your Kids
Sole Proprietor, LLC taxed as a sole proprietor, or if your spouse is also your business partner you should consider putting your kids on your payroll.
There are two reasons you might want to include your kids on your payroll
- W-2 wages paid by a parent to a kid (under the age of 18) are both
- Deductible by the employer/parent
- Exempt from federal payroll taxes for both the parent and the child
Andrea's Tip
Now if you have an S Corp or C corp it does not eliminate the benefits it simply reduces them so read on.
2. Your child can contribute up to $6,000 to either of the following:
- A Tax-deductible IRA, which allows the child to deduct that amount from federal tax. Use this strategy if the child earned more than the $12,200 in W-2 wages and you want the child to have more tax-free money.
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- Remove contributions at any time (if it is not the interest earned)
- Remove up to $10,000 per year for college expenses
- Remove earnings (interest and capital gains) tax-free after age 59 ½. Roth Ira, which is not tax-deductible, but the child can
This one is great when their earnings are under the $12,200 in total W-2 wages and other earned income because they don’t need the tax deduction.
Let’s look at an example of how the Roth IRA works. (I like to use my son for this).
My 15-year-old son has no earned income other than what he earns from me. I pay him $12,000 per year (which is a fair market for the crap that he does for me). I deduct the $12,000 from my business expenses. And I don’t have to pay federal payroll taxes so I get to pocket that.
My son collects $12,000 and pays a big fat 0 to the federal government because
He is exempt from federal payroll taxes,
and
The $12,000 standard deduction eliminates the $12,200 from his taxable income.
Now my son can put up to $6,000 in a Roth IRA and begin savings for college, or retirement or some other financial.
Andrea's Tip
Think your missing out because you’re an S Corp or C Corp? You might be a little because the corporation does the hiring which means you and the kid must pay payroll taxes. Because you don’t get those savings however, your kid still has the Roth IRA and if you file their tax return, they’ll get a refund on the payroll taxes.
Just a Note
The kiddie tax does not apply to the child’s wages and other earned income. The kiddie tax only applies to unearned income, like dividends, interest, and rent.
Get Divorced After December 31st
I’m not telling you to get divorced to save money! But if you happen to be in the unhappy circumstance of getting a divorce you might want to wait until after December 31st.
The marriage rule works like this: you are considered married for the entire year if you are married on December 31.
Many changes in the tax code may have eliminated some of the differences between married and single taxpayers, in most cases the joint return will work to your advantage.
Andrea's Tip
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: Under the new rules, which apply to all agreements executed after December 31, 2018, the payor gets no tax deduction and the recipient does not recognize income.
Own a Home with Your Non-Spouse? You Can Deduct More Interest than a Married Couple
Two single people can deduct more mortgage interest than a married couple.
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.
For example, if you and your unmarried partner live together and own the home together, the mortgage ceiling on deductions for the two of you is $2 million. If you get married, the ceiling drops to $1 million.
Andrea's Tip
If you bought your house after December 15, 2017, then the reduced $750,000 mortgage limit from the TCJA applies. In that case, for two single people, the maximum deduction for mortgage interest is based on a ceiling of $1.5 million.
Get Married On or Before December 31st
Remember, if you are married on December 31, you are married for the entire year.
If you are thinking of getting married in 2020, you might want to rethink that plan for the same reasons that apply in divorce (as described above). The IRS could make big savings available to you if you get married on or before December 31, 2019.
You have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. But a quick trip to the courthouse may save you thousands.
Use Your Gift Tax to Help Loved Ones
If you give money to your parents or other loved ones to help support them and your parents are in the 0 Percent tax bracket for capital gains then do this.
Make a gift of stock versus cash and you can give them up to $15,000 tax-free.
What is the 0 percent tax bracket? A single person with less than $39,376 in taxable income for 2019 or a married couple with less than $78,751 in taxable income pays 0 percent on capital gains.
Let’s give you an example of how this works.
You give Mom and Dad shares of stock with a fair market value of $20,000. Mom and Dad sell the stock and get $20,000 and pays 0 in capital gain taxes. They now have $20,000 in after-tax cash to spend.
Now if you sold the stock, you would have paid taxes on the $20,000
Now, you can only gift up to $15,000 if your single which means $5,000 of your gift will go against your $11.4 million estate tax. However, if you’re married and you make the gift together you each have a $15,000 gift-tax exclusion, for a total of $30,000. Just remember to file a gift-tax return that shows you split the gift.
Andrea's Tip
This no longer works with college students: In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24.
Free Ebook: Grab the Big Fat List of Small Business Deductions: Save money throughout the year with the Big Fat List of small business tax deductions. Use it as a reference all year round to save big at tax time.
Putting it All Together
If you haven’t put your child on your payroll it may be time to take a look at that strategy to save money for both your children and you.
If you are about to get married, consider the mortgage ceiling available to singles co-owning homes as well as the post-TCJA alimony rules. Married or divorced you’re going to be married or divorced all year long (at least when it comes to your taxes).
Make sure you speak to a professional to run your numbers to see if getting married or divorced this year is best for your year-end taxes.
If you helping parents or other family members out it may be a good idea to see what strategies will work best for both of you.
Taxes can be confusing so if you need some help Let’s talk!
Happy Holidays!
Andrea
