1. Put Your Children on Your Payroll
If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you absolutely need to consider having that child on your payroll. Why?
- First, neither you nor your child pay payroll taxes on the child’s income.
- Second, with a traditional IRA, the child can avoid all federal income taxes on up to $18,200 in income.
If you operate your business as a corporation, you can still benefit by employing the child even though you and the child have to pay payroll taxes.
2. Get Married on or before December 31
Remember, if you are married on December 31, you are married for the entire year. If you are thinking of getting married in 2020, you might want to rethink that plan for the same reasons that apply in a divorce (as described above). The IRS could make big savings available to you if you get married on or before December 31, 2019.
You have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. But a quick trip to the courthouse may save you thousands.
3. Make Use of the 0 Percent Tax Bracket
In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24. But this strategy is a good one, so ask yourself this question: do I give money to my parents or other loved ones to make their lives more comfortable?
If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $39,376 in taxable income and to a married couple with less than $78,751 in taxable income.
If the parent or other loved one is in the 0 percent capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.
Example. You give Aunt Millie shares of stock with a fair market value of $20,000, for which you paid $2,000. Aunt Millie sells the stock and pays zero capital gains taxes. She now has $20,000 in after-tax cash to spend, which should take care of things for a while.
Had you sold the stock, you would have paid taxes of $4,284 in your tax bracket (23.8 percent times the $18,000 gain).
Of course, $5,000 of the $20,000 you gifted goes against your $11.4 million estate tax exemption if you are single. But if you’re married and you made the gift together, you each have a $15,000 gift-tax exclusion, for a total of $30,000, and you have no gift-tax concerns other than the requirement to file a gift-tax return that shows you split the gift.