by Paul W. Saunders, CPA, Saunders, Wangsgard & Associates
If you’re the type of person who wants total control of their personal finances and feels that you want to arrange your affairs so your tax will be as low as possible, I have some ideas for you:
- Cut the cost of college with tax credits: When it comes to tax benefits for college education, government help falls into the category of “too many choices,” according to “The Parodox of Choice” by Barry Schwartz. The best credit is the American Opportunity Tax Credit, which is up to $2,500 per student, per year, and is available for the first four years of undergraduate school. The student must be enrolled at least half-time. Qualified education expenses for calculating the credit include tuition fees, book fees, supplies and equipment used in a course of study that must be paid to the eligible education institution for enrollment; and those expenses can include amounts paid by parents, Grandma or another third party.
- Put your child on summer payroll: If your child needs a job for the summer, the perfect solution might be right in front of you. Strategy: Hire your child to work for your business while school is out. Your child is eligible for valuable fringe benefits. If your child is under 18 years old and is employed by a parent in an unincorporated business, the earnings are exempt from payroll taxes (FICA). The exemption also applies to federal and state unemployment. Now that your child has earnings from a job, your child can sock away up to $5,500 in a traditional or Roth IRA. Tip: Pay your child a reasonable amount for the services actually performed.
- Bunch up medical expenses: For 2015, the deduction for medical and dental expenses is limited to the excess above 10 percent of your AGI (7.5 percent if you or your spouse is 65 years old or older as of year end). When it is feasible, schedule elective (e.g. non-emergency) expenses — physical exams and dental cleanings — for the end of the year if you expect to clear the 10-percent-of-AGI mark in 2016. Otherwise, you may as well postpone these visits to another year when at least you will have a chance at the deduction.
- Split family income: If you expect to be in a high-tax bracket for 2016, you might transfer income producing property to other family members like young children or grandchildren, who are in much lower brackets. For instance, with a tax rate differential of 29.6 percent between the top bracket rate of 39.6 percent and the lowest bracket rate of 10 percent, a family can save $2,960 in tax on $10,000 of earnings. But tax savings may be mitigated by the “kiddie tax.” Caution: For 2015, unearned income above $2,100 received by a dependent child under 19 years old, or a full-time student under 24 years old, is taxed at the parents’ top-tax rate.
- Turn vacations into a business deduction: Travel costs incurred while away from home for business purposes are generally deductible, but costs for personal reasons are never deductible. It is not unusual for travel to include elements of both. You can turn a vacation into a business deduction if the trip is primarily business in nature. If more than half of a normal working day is spent for business purposes, it is a business day. This includes time spent fielding phone calls and responding to business email or text messages. Travel days are treated as business days. Weekends and holidays that fall between business days, even if you’re at the beach all day, may be counted as business days if it is impractical for the taxpayer to return home on the weekend.