Your marital and family situations should definitely factor in when it comes to your year-end tax planning for 2021. There are family tax planning strategies you can implement now to take advantage of current tax codes. In addition, there are steps you can take to prepare for new tax codes in 2022.
If you are getting married, divorced, having children, removing dependents from your tax return, or giving tax-free gifts to family members, you’ll want to consider all family issues as part of your year-end tax planning. Here are a few ideas we recommend:
If you own a business that’s structured as a Schedule C sole proprietorship or spousal partnership and have children under the age of 18, you should consider putting your child(ren) on your payroll. First of all, neither you nor your child would have to pay payroll taxes on their income. Second, the child can avoid all federal income taxes on up to $18,550 in income if a traditional IRA is established.
Corporation owners can still benefit from putting children on the payroll with various tax advantages, though you and the child will be paying payroll taxes.
If you are getting a divorce, wait until after December 31 to finalize it. The marriage rule for taxes is simple. If you are married on December 31, you are considered married for the entire tax year. In most cases, this will allow you to file jointly and take advantage of married tax benefits. This strategy may not work for everyone, so it’s a good idea to consult with your tax advisor to determine the ideal divorce date.
The Tax Cuts and Jobs Act (TCJA) of 2017 changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018. Under the new rules, the spouse paying the alimony gets no tax deduction and the recipient does not recognize the payments as taxable income.
Two single people are able to 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 can individually deduct mortgage interest on up to $1 million of a qualifying mortgage.
For example, let’s say you and your unmarried partner live together and own the home together. In this situation, the mortgage ceiling on tax deductions for the two of you is $2 million ($1 million each). Once married, that ceiling drops to $1 million total. The TCJA reduced the deductible mortgage limit to $750,000 for any house purchased after December 15, 2017. The maximum mortgage deduction for two single people would then be $1.5 million total ($750,000 each).
Remember the marriage rule mentioned earlier? If you are married on December 31, you are considered married for the entire year. If you are planning to get married early in 2022, you may want to rethink the date or at least get legally married before the end of 2021. Save the big ceremony for next year if you want. The IRS offers better tax savings for married couples on their 2021 tax returns. Again, consult with your tax advisor to see if this is a strategy worth pursuing. If the numbers work out, it may make sense to get married now.
The “kiddie tax” now applies to students up to the age of 24, so college students are no longer part of this strategy. However, you can still take advantage of the 0% tax bracket rules if you give money to parents or other loved ones to help with living expenses. This works if the recipient is in the 0% capital gains tax bracket, which applies to single people with less than $40,400 in taxable income and married couples making less than $80,800.
The strategy is to give them appreciated stock rather than cash. They can sell the stock and both of you would avoid having to pay capital gains taxes. It’s a win-win situation that benefits both parties.
Just remember that the amount of stock you gift will still count against your $11.7 million lifetime estate tax exemption if you are single. If you are married, you will have more flexibility in your gifting. You may not have to deal with any gift tax concerns, depending on the amount you gift.
Family tax planning can be advantageous if you understand tax laws and know when and how to benefit from specific tax planning strategies. The end of the year is the ideal time to make some important moves. Talk with your financial advisor or tax specialist to determine which year-end tax strategies make the most sense for you and your family.
Contact Illumination Wealth today for help with all your wealth management, tax planning, business planning and financial planning needs. Let our team of expert advisors guide you on the road to financial independence.