Year-End Tax Strategies
Marriage, Kids, and Family
If you are thinking of getting married or divorced, you need to consider December 31, 2021, in your tax planning.
Also, do you give money to family or friends (other than your children, who are subject to the kiddie tax)? If so, you need to consider the zero-taxes planning strategy.
And now, consider your children who are under age 18. Have you paid them for work they’ve done for your business? Have you paid them the right way?
Here are five strategies to consider as we come to the end of 2021.
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 absolutely 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 $18,550 in 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, in most cases the joint return will work to your advantage.
Warning on alimony! The TCJA changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018:
- Under the old rules, the payor deducts alimony payments and the recipient includes the payments in income.
- 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.
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 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 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.
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 2022, you might want to rethink that plan for the same reasons that apply in a divorce (as described above). The IRS could make big savings available to you for the 2021 tax year if you get married on or before December 31, 2021.
You have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. But if the numbers work out, a quick trip to the courthouse could save you thousands.
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 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 $40,400 in taxable income and to a married couple with less than $80,800 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.
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 to spend, 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, $5,000 of the $20,000 you gifted goes against your $11.7 million estate tax exemption if you are single. But if you’re married and you made the gift together, you each have a $15,000 gift-tax exclusion, for a total of $30,000, and you have no gift-tax concerns other than the requirement to file a gift-tax return that shows you split the gift.
Medical Plan Strategies
All small-business owners with one to 49 employees should have a medical plan for their business. Sure, the tax law does not require you to have a plan, but you should.
Most of the tax rules that apply to medical plans are straightforward when you have 49 or fewer employees.
Here are six opportunities for you to consider:
- Make sure to claim the federal tax credit equal to 100 percent of required (2020) and voluntary (2021) emergency sick leave and emergency family leave payments. It’s likely that you made payments that qualify for the credits.
- If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2021 deductions, and then put yourself on a monthly reimbursement schedule in 2022.
- If you want to implement a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), make sure to get that done properly now. You are late, so you could suffer that $50-per-employee penalty should you be found out.
- But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, be sure to consider the Individual Coverage Health Reimbursement Arrangement (ICHRA). The ICHRA has more advantages.
- If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance, and (b) put it on your W-2. Make sure that the reimbursement happens before December 31 and that you have the reimbursement set up to show on the W-2.
- Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2021 and possibly in prior years.