Cutting Taxes Archives

Hiring Your Kids to Cut Taxes, Part 6: Small Business Guide to Reducing Your Tax Burden Legally

By Office Staff|2020-10-08T20:49:28-07:00August 25, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden, Uncategorized|Tags: Cutting Taxes, Hiring Your Children|0 Comments

Do you ever get the feeling that your kids are taking you to the cleaners? We’re not talking about the cost of necessities such as daycare, living space, food, school supplies, and clothing. It’s those discretionary expenses, like cell phone service, sports leagues, music lessons, games and entertainment, outings with friends, and car and driving expenses.

If you’re paying for all that, you’re doing so with after-tax dollars. And you should be putting the brakes on that habit immediately if not sooner.

As a small-business owner, you’re allowed to hire your family members (including children, grandchildren, parents, siblings, nieces, nephews) to work for your business, pay them a fair and reasonable wage, and then have them pay for their own bells and whistles. In addition, they can sock away some of that money to use later for college or to buy a car, pay for their own lavish wedding, start a business or support the start-up costs associated with starting a family, retire, pay for college or whatever else they decide to do when they’re ready to do it.

Even better, you won’t have to pay income tax or self-employment tax on the wages you pay them, and chances are good, in the case of your children, that neither will they. Also, when you hire your own children to work for you, the wages you pay them are exempt from FICA (Social Security and Medicaid) withholdings and federal unemployment (FUTA) tax unless your business is incorporated. Some restrictions apply, of course, but this tax loophole is perfectly legal and something that all small-business owners with children should consider.

So, How Does This Work?

Here’s how it works: You hire your child and the business pays them. Their first $12,400 of earned income is taxed at zero. That’s because $12,400 is the standard deduction for a single taxpayer, even if you claim them as your dependent. Their next $9,876 of taxable income is taxed at just 10 percent.

Here are the basic rules: Continue reading… Continue reading… Continue reading…

Understanding How Shifting Income May Reduce Taxes

By Laura Stees, CPA|2020-03-12T15:41:18-07:00March 12, 2020|Categories: Taxes|Tags: Business Income, Cutting Taxes, Shifting Income, Tax Planning|0 Comments

In our previous post — Four Proven Ways to Cut Your Taxes — we highlighted four areas we focus on when seeking to reduce the amount of taxes our clients owe state or federal taxing authorities: shifting, timing, code, and product. In this post, we take a deeper dive into the technique known as shifting, which involves transferring income or assets from a high-tax-bracket person or entity to a person or entity subject to low or zero taxes.

For example, suppose a portion of your business income is taxed at 37 percent, which is currently the highest income tax rate in the U.S. You hire a teenage son and daughter to work for you over the summer and pay each of them $12,400. As a result, you save $24,800 x 0.35 = $8,680 in federal income tax plus any state taxes as well as potentially any amount you would have been required to pay in self-employment tax on that $24,800. Assuming neither child earns more than $12,400, because of the current tax code, they pay nothing in federal taxes. This is a great way to shift business income you don’t need for yourself to your children.

This example illustrates just one of several shifting techniques that can be used to reduce one’s tax burden. Several techniques are available that can be broken down into the following two areas:

Business income: In business, the primary objective of shifting is to reduce personal income tax and, in many cases, pay less in self-employment taxes (Social Security and Medicare).
Estate planning: In the context of estate planning the objective is to reduce individual income taxes levied on investment income and capital gains while ultimately reducing or eliminating estate taxes. In this post, we touch lightly on shifting the context of estate planning, while in a future post provide more in-depth coverage of this topic.

Income Shifting in Business

If you own a business, you have three ways to use income shifting to reduce your tax bill: Continue reading… Continue reading… Continue reading…

Four Areas for Cutting Taxes, Growing Net Worth, and Achieving Peace of Mind

By Laura Stees, CPA|2020-03-06T12:43:13-08:00March 6, 2020|Categories: Financial Planning|Tags: Business Expenses, Business Income, Cutting Taxes, Exit Planning, Investments, Tax Planning|0 Comments

People are funny. We tend to plan more for a vacation than we do for our own and our family’s financial future. Planning for vacation involves choosing a destination; deciding how to get there (means of travel, route, stops along the way); deciding how long to stay, where, and what to do while on vacation, and more.

Financial planning and even a subset of that — tax planning — is more involved and complex, yet we invest less time and effort engaging in it. As a result, many of us pay more than our fair share in taxes, leaving us with less of our annual earnings to enjoy and to invest in our own and our family’s future security, comfort, enjoyment, and self-fulfillment.

One way to simplify the process of tax and financial planning is to break down the task into distinct areas of your life where you can cut taxes, grow your net worth, and achieve peace of mind. This post steps you through that process.

Area 1: Family, Home, and Job

Age-old wisdom advises that “charity begins at home,” meaning that before we can help others, we need to build a firm foundation for our own financial health. It also means taking care of those closest to us first — our family members and friends.

Tax-savings and financial planning strategies should also begin at home with family, home, and job. Areas of focus should include the following: Continue reading… Continue reading… Continue reading…

4 Proven Ways to Cut Your Taxes

By Laura Stees, CPA|2020-03-03T19:30:04-08:00March 4, 2020|Categories: Taxes|Tags: Cutting Taxes, IRS Code, Product, Shifting, taxes, Timing|0 Comments

As an individual, business owner, or investor, you leverage the power of compounding returns to grow wealth exponentially. Using a different approach, you can slash your taxes by layering four distinct tax-cutting strategies. Applying one strategy alone delivers good results, applying two strategies in tandem improves results, and applying all four maximizes your tax savings and increases your net worth. With every added layer, you not only keep more of your money, but also have more to invest to reap the rewards of compounding returns.

This post reveals four key tax-cutting strategies and explains how to leverage them, alone and together, to maximize your savings.

Shifting

Shifting involves moving taxable income from a higher tax rate person or entity to a lower one; for example, from a parent to a child, from an adult child to a parent, from a sole proprietorship to a corporation. In many cases, shifting delivers the added benefit of moving taxable income to a less audited entity, as well. Changing your business entity from sole proprietorship to S-Corporation opens the door to more tax strategies, lower tax rates, and lower audit rates.

Keep in mind that if you don’t specify an entity for your business, sole proprietorship, the least tax efficient, is the default chosen for you. Instead of letting the government default to that choice, make it yourself and take control of your tax rates.

Timing

In the tax world, timing isn’t everything, but it is certainly valuable in helping to reduce one’s tax burden. Timing strategies generally defer taxes to future dates to take advantage of lower future rates or utilize the time value of money. The most obvious tax strategy related to timing involves deferred tax instruments, such as individual retirement plans and 401Ks. Continue reading… Continue reading… Continue reading…