Posted on by Jan Roberg

Last Minute Tax Tip: Hire Your Kids

Hire your kids

Reduce your taxes, hire your kids to work for you!

Do you own your own small business as a sole proprietorship? Do you have kids? If so, did you know that you can pay your kids to work in your business and they won’t be subject to social security and Medicare taxes? Now if you pay them more than their standard deduction, they could be subject to income tax withholding but even so, not having to pay the employment tax is a big savings. You also don’t have to pay Federal Unemployment taxes either.

Why is this good to know? Well if you pay your kids wages from your business, it’s a business deduction and that’s money you’re keeping in the family and not paying self employment taxes on. It’s important to keep the wages commensurate with work that the kids actually perform. The IRS isn’t going to buy the idea that your 4 year old is earning $50,000 a year doing statistical analysis for your company. But what can your kids actually do?

My first job was handling all of the scut work that the secretaries in the office wouldn’t do. I cleaned the white board in the meeting room, made the coffee, made photocopies and ran errands. I was happy because I was getting paid, the secretaries were happy because they didn’t have to do those jobs any more, and the boss was happy because his staff was happy. I was 15 at the time, but frankly a much younger kid could have handled that job.

My son’s in college now, but he used to be my IT guy. For the cost of a Chucky Cheese pizza and some tokens, he’d take care of any computer problems I had. After he left for school, I had to hire a professional to help me. The freelance IT person I hire costs me $99 per hour. I had no idea how valuable my son was as an employee until he went away. I had never paid him a wage. (Granted, I’m paying through the nose for tuition but that’s another story.) What I should have done was pay him a wage and let him buy his own pizza. That would have reduced my self-employment taxes.

So what about your kids, do they help you with your business? Can they? Would they? If the answer is yes, then you might want to consider putting them on the payroll.

Who’s allowed to do this? There are only two categories of businesses where you can put your children on the payroll without paying employment taxes. One is sole proprietors; that’s businesses that file a schedule C with their 1040 tax return. The other is partnerships where both of the partners are the parents of the children working. If there is even one partner who is not a parent of the child, then you must pay the payroll taxes. Also, if you own a corporation of any kind, you must pay employment taxes on your child’s wages.

With the year end fast approaching, and winter break heading this way, now might be a perfect time to test the waters for hiring your kids. The money you pay them now will reduce your taxable income for 2010.

Posted on by Jan Roberg

Last Minute Tax Tip: Another Missouri Tax Credit

Save kids lives, donate to the St. Louis Crisis Nursery

St. Louis Crisis Nursery still has tax credits available for 2010. For a gift of $1,000 you can receive a tax credit worth $500 against your Missouri state income tax return. $1,000 is the minimum amount you must donate in order to qualify for the tax credit. In addition to claiming the Missouri tax credit, you will also be able to deduct your contribution against your federal income.

This program is limited in scope so you should call first to make sure that the tax credits are still available. Contact Betsy at (314) 292-5770. Even if you can’t qualify for the Missouri Tax Credit, you may still wish to make a donation. The whole focus of the St. Louis Crisis Nursery is saving babies’ lives and keeping kids safe. Who doesn’t think this is a good thing?

The Crisis Nursery qualifies for the tax credits under the Youth Opportunities Program and the Neighborhood Assistance Programs. It’s important to remember that many of these tax credit programs are in danger of being discontinued in the future so you may never get another opportunity to take advantage of them.

If you’d like to learn more about the Saint Louis Crisis Nursery, check out their website at: http://www.crisisnurserykids.com/index.htm

For more information about Missouri tax credits, you can go to the Missouri website: http://dor.mo.gov/taxcredit/ or just call me.

Remember, time is of the essence here.  There are only so many credits available and they are for 2010.  If you have any interest in this tax credit program whatsoever, call Betsy at (314) 292-5770  now.

Posted on by Jan Roberg

Last Minute Tax Tip: Donating Stock to Charity

You can avoid capital gains taxes by donating appreciated stock to charity.

Sometimes the best strategy for a charitable donation is to donate stock.

December is always the big  push time for charitable donations.  If you’ve ever thought about donating your stock holdings instead of plain cash, here are some things you should know.

First, if you have stock that has appreciated in value, you want to give the charity the stock and let them sell it for cash, instead of you selling it and giving them cash.  The reason is because you get to claim the charitable deduction for the fair market value of the stock you gave away, but you don’t have to pay any capital gains tax on the increase.  You have a win/win/win situation.  (No capital gains, plus charitable deduction, plus the charity gets stock they can sell for cash=win/win/win.)

Second, if you have stock that has gone down in value, you want to sell it first and then give the cash to the charity.  This is exactly the revese of the above.  By selling stock that’s gone down in value, you get to claim a capital loss which can offset you capital gains or up to $3,000 of your ordinary income.  Once again you have a win/win/win situation.  (Claim loss against income, get charitable deduction, plus charity gets cash.)

Although December 30 and 31 are the highest giving days for charity donations, you need to do this a little earlier in the month so that your brokerage has time to do all the transactions.  Make sure you have some wiggle room for your stock transactions to actually close and get it all done before Christmas.  Earlier if possible.

Bottom line:  stock goes up — give it directly to charity, stock goes down — sell first then give money to charity.  It’s that easy.

Posted on by Jan Roberg

Last Minute Tax Tip: Caring for the Elderly?

...to very old people (99 years)

Photo by Maufdi

Are you caring for a spouse or a parent who is over 60 years of age and physically and/or mentally incapable of living alone?  If you live in Missouri, there may be a tax credit for you.  It’s called the Missouri Shared Care Tax Credit and it could be worth up to $500 off of your Missouri state income taxes.

In order to qualify for this tax credit, you must live in the same residence as the person you’re caring for for more than 6 months during the tax year and you must not get paid for providing care.

The person you’re caring for must not receive funding or services through Medicaid or social services block grant funding.  (Medicare is fine, it’s just Medicaid that’s not allowed.)   

To qualify for a tax credit, you will need to have your physician, or the Division of Senior and Disability Services, Missouri Department of Health, sign a certification form that says the person you care for is incapable of living alone and must acquire necessary home care to avoid placement in a care facility.  That’s why I’m putting this in the “to do in December” list–getting the certification part may take some time.

When you think about the stress and the cost of caring for someone at home, this doesn’t really seem like much of a tax credit.  On the other hand, there are already so many people already caring for an elderly spouse or parent at home and not getting anything for it, I wanted to make sure that I got this message out.  By the way, if you’ve been caring for someone for a few years, you can go back and amend old state returns to claim this credit.  You can go back up to three years.

To learn more that the Shared Care Tax Credit, click on this link to the Missouri Department of Revenue website:  http://dor.mo.gov/taxcredit/sct.php

Posted on by Jan Roberg

Last Minute Tax Tip: Deductions for High Income Earners

The idea of tax deductions for high income earners must sound preposterous, especially if you’re a high income earner.  You know how it goes, you try donating money to charity or taking advantage of any of the other tax deductions only to find that your deduction is “limited due to your income.”  So what’s the point?

Well this year, there is a point.  Itemized deductions and exemptions aren’t phased out for high income taxpayers for 2010.  Last year, if you earned over $166,800 you started to lose out on your deductions.  The higher your income, the less valuable your deductions were.   Only for 2010 are you allowed all of your itemized deductions.  You also get 100% of your exemptions also.

But what about the Alternative Minimum Tax or AMT?  Won’t that get us anyway?  Well, yeah.  AMT is a problem for high income earners.  But, and this is important, charitable deductions aren’t eliminated in the AMT calculation.  AMT dings you for your state tax payments, miscellaneous deductions (like employee business expenses), and some types of mortgage payments.  Your charitable contributions still count as a deduction in the AMT calculation.  Even if you’re stuck paying AMT, you’re still better off having that charity deduction on your tax return.

Bottom line:  If you are a high income earner, there has never been a better time for you to make a charitable contribution.

Posted on by Jan Roberg

Last Minute Tax Tip: Pay Up Your Alimony Now

Let’s face it, divorce sucks and paying alimony is even worse. But if you have an arrangement where you are supposed to be paying alimony (and I mean alimony, not child support) it’s to your advantage to pay up for the year before December 31. Here’s why:

Money that is paid out as alimony is a tax deduction for you. (And, if it’s any consolation, it’s taxable to your ex.) Child support, on the other hand, gives you no tax deduction and your ex pays no income tax on it.

Alimony is considered to be an “above the line” deduction. That means it lowers your adjusted gross income. Now that sounds like a lot of accounting jibberish, but on your tax return, it’s valuable. It can make the difference between whether or not you qualify for other deductions or tax credits. Made simple: above the line deductions are good.

Now here is the really important part: if you pay both alimony and child support, and you’ve missed some payments, then whatever payments you have made get counted as being child support first, and alimony second. Okay, in plain English: Let’s say you’re supposed to pay $100 a month for alimony and $200 a month for child support. $300 a month total. (Okay, that must sound like a fantasy but I like easy numbers.) Anyway, suppose you were good all the way up through September at paying $300 a month but then something happened and you didn’t make any payments from October through December.

For those first nine months you paid a total of $2,700. In your mind you paid $900 in alimony and $1800 in child support, right? Except that’s not how the IRS sees it. To them you paid $2,400 in child support and $300 in alimony, because for tax purposes you pay the child support first. So with the money that you did pay, you don’t get your full deduction. And let’s be real here, we’re probably talking about bigger numbers in real life. This tax deduction can really make a difference.

Bottom line: if you want to claim your full alimony deduction, all of your alimony and child support for the year must be paid in full by December 31st.

Posted on by Jan Roberg

Last Minute Tax Tips: Do You Own a Corporation?

When I ask, do you own a corporation, I’m talking about a C-Corp, not an S-Corp. And I’m not talking about being just a shareholder in Coca Cola or GM, this post is specifically for people who own their own business and have it set up as a regular corporation.

It’s time to think about a qualified dividend distribution. Right now, qualified dividends–and here I’m talking about money that’s been held for over one year, are taxed at the capital gains tax rate. Right now, the capital gains rate for most people is 15%. Next year, there’s talk of changing that. And even with the various proposals going on in Congress, qualified dividends may still lose out and get taxed at a higher rate anyway. No matter what, you can pretty much assume that the tax rates will not go down.

So, right now, it’s time to think about a distribution. Many owners of small corporations like to keep excess funds within the corporation (that’s your retained earnings) and it makes sense so that you have money to grow the company with. And, to be honest, for some people, it’s a bit of a tax shelter-“save it for a rainy day” kind of thing. Holding money in the corporation so they don’t pay personal income tax on it unless they really need it. If you’re in the “rainy day tax shelter” camp–now is your rainy day. For most people in your situation, taking the money now is going to cost you less than taking it in the future.

So what do you need to do? Well, I always tell my clients to never take some random advice they read off of the internet, and I’m going to tell you the same thing. You need to sit down with your accountant (or accountants if you use separate ones for your business and personal taxes) and make a plan. Here’s what you want to consider:

1. How much money is available in the corporation to give as a qualified distribution? Qualified is the important word here because a non-qualified distribution is taxed at your ordinary income rate. You want a qualified distribution because of the lower tax rate. Use your good business judgement, don’t take out too much, just the excess.

2. You’ll want to see how your personal 2010 tax return will be affected if you take in that extra income. (Also, if you’re not the sole shareholder, will taking a distribution hurt your fellow shareholders as well?) Saving money on the tax rate is good only if it doesn’t hurt you somewhere else. For example, if your higher income keeps you from claiming the education tax credit on all that tuition you paid to send your kid to college, then the cost of taking the qualified dividend might outweigh the benefit of the lower tax rate. That’s why you want to sit down with your tax person and figure this out before you try it. You may be playing a balancing act — let’s say a $20,000 distribution won’t work, but what if you take $5,000 instead? Computer tax planning programs were made for these situations. What’s important is that you do it now, before December 31st. If you wait until next month–you’ve missed your opportunity.

Posted on by Jan Roberg

Last Minute Tax Tips: Missouri Food Pantry Credit

UPDATED FOR 2013

 

Did you know that if you donate money to a local food pantry in Missouri, you may be eligible for a Food  Tax Credit worth 50% of what you donate?  Let’s say for example that you gave $500 to your local food pantry.  You would get a receipt (or have the food pantry sign a special form) and then you’d use that to take $250 off of your Missouri state tax liability.  But that’s not all!  It’s a charitable donation so if you file a Schedule A to itemize your deductions, you’d reduce your federal taxable income by $500.  So if you’re in the 25% tax bracket, that would be another $125 you’d get back on your taxes.  That’s like paying $125 to have $500 worth of value.

But it’s even better than that.  I read on one of the food pantry websites that for every $1 of cash donated to the pantry, $20 worth of food is generated for the hungry.  It’s a gift that just multiplies.

You can’t claim a credit for over $2,500 (that would be a $5,000 donation.)  The credit is non-refndable, that means you can’t get a credit for more than the amount of your tax liability. Remember, since you’re getting a tax credit for the donation, you don’t get to claim the donation as a deduction on your Missouri return-it’s an adjustment you’ll have to make on the return.

The state of Missouri has only allocated $2,000,000 for the tax credit.  What happens is that all the credits are held until April 15th before they are allocated.  If there are over $2,000,000 of credits applied for, they will be allocated among the applicants.  In that situation, the credits that you weren’t able to use can be carried forward to next year.

This is one of the those few tax credits that normal, everyday kind of folks can use.  There’s no dollar minimums but I recommend donating at least $100 to make it payoff.  Most tax companies charge an extra fee for preparing Missouri Tax Credits.  It doesn’t make sense to claim a credit for less than the amount of the charge to prepare the form.

For more information about the Food Pantry Tax credit, click here to go to the Missouri Department of Revenue web site:  http://dor.mo.gov/taxcredit/fpt.php

The food pantry shelves are low and the need is at an all time high.   Even if you don’t want or need a Missouri tax credit, this is a charity that’s worthy of your support.

Posted on by Jan Roberg

Last Minute Tax Tips: Federal Tax Credits for Energy Efficiency

2010 is almost over but you still have time to take advantage of the Federal Tax credits for energy efficiency.  Here’s the quick and dirty on it:

You can get a 30% tax break on the cost of adding insulation, energy efficient exetrior windows, doors or skylights, or a heating and cooling system.  The maximum amount you can get is $1,500.  If you received $1,500 for this credit last year, you can’t get it again this year.  If you only got part of the credit (say $800) then you can receive up the the remaining $1,500 (in this case, $700) this year.   This is the most common energy tax credit that people are claiming on their tax returns.  Anything you buy must be installed in your principal residence by December 31, 2010.  Principal residence, it means you have to live in the house also.  It can’t be a second home or a rental unit.

If you’re really into alternative energy, there’s a different energy credit that also gives you a 30% tax break with no dollar limit.  This is for stuff like solar water heaters, geothermal heat pumps and small wind turbines.  You must also install these items by December 31st, but you can put them on a second home as well as your principal residence.

Know what you’re getting before you buy though.  Crazy as it may seem, not every energy efficient item is included in the tax credits.  The best way to figure out if you’ll qualify for the tax credit is through the Energy Star website:

  http://www.energystar.gov/index.cfm?c=tax_credits.tx_index 

Lets say you want to buy a water heater.  Go to the site, scroll down to where it lists items you can purchase for the tax credit and click on “water heater (non-solar)” .  The site will tell you what qualifications your new water heater needs to have in order to qualify for the tax credit.  The web site has all sorts of information, including frequently asked questions.  Best of all, it’s in plain English.