If you have children under the age of 18 and you file your business tax return as a proprietorship or partnership, you can find big savings in the work your children do for your business. And if you operate as a corporation, don’t neglect to hire your children; there are good savings for you there, too.
In this blog, you will find five year-end 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.
- Put Your Children on Your Payroll
Did your children under age 18 help you in your business this year? Did you pay them for their work? You should pay them for the work—and pay them on a W-2. Why?
First, W-2 wages paid by the parent to the parent’s under-age-18 child for work done that will be reported on the parent's Form 1040 Schedule C business are:
- deductible by the employer-parent, and
- exempt from federal payroll taxes for both the parent and the child.
Thus, if you operate your business as a sole proprietorship or single-member LLC taxed on Schedule C or as a spousal partnership:
- You face no federal payroll taxes on the W-2 wages you pay your under-age-18 child.
- In most states, you face no state payroll taxes.
- Your under-age-18 child faces no federal payroll taxes, and in most states, no state payroll taxes.
If you operate as a corporation, your child and the corporation pay payroll taxes. But that does not eliminate benefits; it simply reduces them.
Second, thanks to tax reform, your child can use the 2022 standard deduction to eliminate income taxes on up to $12,950 in wages.
Third, your child can contribute up to $6,000 to either of the following:
- A tax-deductible traditional IRA, which allows the child to deduct that amount from federal taxation. This is the best strategy to use if the child has more than $12,950 in W-2 wages and you want the child to have more tax-free money.
- A Roth IRA, which is not tax-deductible, but the child can (a) remove the contributions (money put in) at any time, tax- and penalty-free; and (b) remove the earnings tax-free after age 59 1/2. This is the best strategy to use if the child has $12,950 or less in total W-2 wages and other earned income because the child has no need for a tax deduction.
- Get Divorced after December 31
The marriage rule works like this: you are considered married for the entire year if you are married on December 31. Although lawmakers have made many changes to eliminate the differences between married and single taxpayers, in most cases, the joint return will work to your advantage. Thus, it may be better to wait until next year to finalize the divorce.
The only way to know the true impact of being married before or after December 31 is to run the taxes in a before-and-after scenario. True, that’s an inconvenience, but it can produce a most worthwhile result. And if you are married on December 31, don’t file in April as married, filing separately. In most cases, this is a sure way to overpay your taxes.
- 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 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 partner live together and own the home together (but are not married), the mortgage ceiling on deductions for the two of you is $2 million. If you get married, the ceiling drops to $1 million. 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 31
Remember, if you are married on December 31, you are married for the entire year.
If you are thinking of getting married in 2023, 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 for the 2022 tax year if you get married on or before December 31, 2022.
Again, 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.
- Make Use of the 0 Percent Tax Bracket
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.
But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?
If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $41,675 in taxable income and to a married couple with less than $83,350 in taxable income.
If the parent or other loved one is in the 0 percent capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.