Tax planning

Tax Strategies for Married, Divorced, and Under-18 Children

Are you thinking of getting married or divorced? If so, consider December 31, 2023, in your year-end tax planning.

Do you give money to family or friends (other than your children, who are subject to the kiddie tax)? For 2023 you can give anyone up to $17,000 with no gift tax reporting.

And now, consider your children who are under the age of 18. Have you paid them for the work they’ve done for your business?

Here are five strategies to consider as we come to the end of 2023.

1. Put Your Children on Your Payroll

If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you need to consider having that child on your payroll. Why?

  • First, neither you nor your child would pay payroll taxes on the child’s income.
  • Second, with a traditional IRA, the child can avoid all federal income taxes on up to $20,350 of earned income.

If you operate your business as a corporation, you can still benefit by employing the child even though both your corporation and your child suffer payroll taxes.

2. 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, the joint return will work to your advantage in most cases.

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 old law, the payor deducts alimony payments and the recipient includes the payments in income.
  • Under the new law, which applies to all agreements executed after December 31, 2018, the payor gets no tax deduction and the recipient does not recognize income.

3. 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 a spouse, and if 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.

If you and your unmarried partner bought your house after December 15, 2017, the reduced $750,000 mortgage limit applies, and your ceiling is $1.5 million.

4. 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 2024, you might want to rethink that plan for the same reasons that apply to divorce (as described above). The IRS could make considerable savings available to you for the 2023 tax year if you get married on or before December 31, 2023.

To know your tax benefits and detriments, you both must run the numbers in your tax returns. If the numbers work out, you may want to take a quick trip to the courthouse.

5. 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 that 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 $44,625 in taxable income and to a married couple with less than $89,250 in taxable income.

If the parent or other loved one is in the 0 percent capital gains tax bracket, you can add to your bank account by giving this person appreciated stock rather than cash.

You should also take advantage of tax loss harvesting. Consult your investment advisor.

Example. You give Aunt Millie shares of stock with a fair market value of $20,000, for which you paid $2,000. Aunt Millie sells the stock and pays zero capital gains taxes. She now has $20,000 in after-tax cash, which should take care of things for a while.

Had you sold the stock, you would have paid taxes of $4,284 in your tax bracket (23.8 percent x $18,000 gain).

Of course, $3,000 of the $20,000 you gifted goes against your $12.92 million estate tax exemption if you are single.

If you’re married and you make the gift together, you each have a $17,000 gift-tax exclusion, for a total of $34,000, and that eliminates the gift tax. But you must file a gift-tax return that shows the government you split the gift.

I know that taxes can cause confusion. Remember, that’s why you have us. If you want to discuss any of the strategies described above, please call us at 440-247-1178 or get in touch via email.

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