Year-End Tax Planning: Family Tax Strategies

Are you planning to get married or divorced soon? Do you give money to family or friends? Do you pay your children to work for your business?

If you answered “yes” to any or all of these questions, you will need to consider December 31, 2022 in your tax planning. There may be some moves you can make before the end of the year to tax advantage of specific tax benefits and limit your tax liabilities.

Here are five strategies to consider in your year-end tax planning:

1. Put Your Children on Your Business Payroll

If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietorship or as a spousal partnership, you can benefit from putting your child on your business payroll. There are two tax benefits this can provide:

• Neither you nor your child would pay payroll taxes on the child’s income.
• With a traditional IRA, the child can avoid all federal income taxes on up to $18,950 of earned income.

Even if you operate your business as a corporation, there are still tax benefits that come with putting your child properly on your payroll. 

2. Wait Until 2023 to Get Divorced

If you are married as of December 31, you are considered married for the entire 2022 tax year according to the IRS tax laws. A joint tax return will still work to your advantage in most situations, so it may be a good idea to wait until after the New Year to finalize your divorce.

It is also important to understand that the Tax Cuts and Jobs Act (TCJA) did change the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018. Under the old law, the payor could deduct alimony payments and the recipient included the payments as part of his/her income. Under the new law, the payor gets no tax deduction and the recipient does not recognize the payments as taxable income.

3. Stay Single for Increased Mortgage Deductions

If you own a home with someone other than a spouse, you may be able to deduct more mortgage interest. Two single people can deduct more more mortgage interest than a married couple. This is true only if you bought the house on or before December 15, 2017. An individual can deduct mortgage interest up to $1 of a qualifying mortgage. That means two people could each claim up to $1 million ($2 million total max), while a married couple can only claim up to $1 million between them.

If you bought your home after December 17, 2017, then the reduced limit of $750,000 applies, which still covers most homeowners and benefits single taxpayers filing separately.

4. Get Married Before December 31

This may be a rush, but you can legally get married on or before December 31 to be considered married for the entire year. This can provide considerable tax benefits when filing as a married couple rather than as individuals. It is a good idea to consult with a tax advisor and see if being married or staying single will provide more tax benefits.

5. Take Advantage of the 0% Tax Bracket

You could use this clever tax strategy in the past with a college student, but the kiddie tax now applies to students up to the age of 24. However, this strategy can still be a good one if you give money to family or friends who are not subject to the kiddie tax. If you are giving money to loved ones to help make their lives more comfortable and they fall in the 0% capital gains tax bracket, you can benefit from tax deductions.

The 0% capital gains tax bracket applies to any single person with less than $41,675 in taxable income and to a married couple with less than $83,350 in taxable income. You can add to your bank account by given them appreciated stock rather than cash. They will be able to sell the stock and pay 0% capital gains, while you can claim the gift on your tax return. There are some complex rules with this strategy, so it is important to consult with a professional tax advisor to make the most of your gifting and financial support planning.

For help with all your year-end tax planning needs and getting your financial plan in order for 2023 and beyond, contact the team at Illumination Wealth today and schedule a free introductory consultation with one of our experienced advisors.