4 Maneuvers Families Can Use to Reduce Their Taxes

Dec 4th 2015
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These being the troublesome times they are, friends or relatives who are strapped for funds may try to tap their lines of credit at the Bank of You. Before doling out dollars, do the paperwork necessary to establish that the transactions actually are loans.

Be sure to have debtors sign agreements or notes stipulating amounts advanced and repayment provisions, as well as when they must make interest payments. Charge a realistic rate of interest, say, whatever your money would earn in a savings account if it weren't out on loan.

At Form 1040 time, you'll be rewarded for your foresight: Loans that later become worthless are deductible under the rules for short-term capital losses. What if you just shake their hands and skip the paperwork? Expect skeptical tax collectors to throw out write-offs for “loans” that really were nondeductible gifts.

Here are three more tax-saving opportunities for families.

Shift investment income. Tax rates for capital gains and dividends are zero percent for individuals who are in the lowest income tax brackets of 10 and 15 percent – for 2015, taxable income below $74,900 for married couples filing joint returns, $37,450 for single individuals and married couples filing separate returns, and $50,200 for heads of households.

Gifts of assets that generate income are just one of the income-splitting strategies that make it possible to divide income among several individuals. When Form 1040 time rolls around, the payoff is the family as a unit loses less to taxes.

Another benefit of property transfers is that they reduce the value of assets subject to potential estate taxes upon death. But as part of their planning, donors need to consider gift taxes when they make sizable lifetime transfers of assets. Or instead of lifetime gifts, should the assets pass through their estates to their heirs? Bequeathed property gets stepped up in basis from its original cost to its date-of-death value, meaning the heirs are subject to capital gains taxes only on post-death appreciation.

Of course, neither parents nor any other benefactors should make gifts of assets that have gone down in value since purchased. They forfeit the loss deductions by doing so. Instead, they should sell the property and claim tax losses that are offset against income taxed at their higher rates. Then they can make gifts of the sales proceeds.

Alimony. Individuals who make alimony payments can claim them on the front of the 1040 form – the same way they claim write-offs for things like job-related moving expenses and money moved into IRAs and other tax-deferred retirement plans. But no additional alimony deduction for a generous ex-husband who voluntarily makes payments to his ex-wife in excess of the ceiling set by the divorce decree. His reward will be in whatever kind of life is yet to come, not on April 15.

Profit from paying your kids. Can your children help out with some of the chores connected with your family's business? Then a savvy way to take care of their allowances or spending money – at the expense of the IRS – is to pay them wages for work they do on behalf of the business. This is a perfectly legal way to keep income in the family while shifting some out of your higher bracket and into their lower bracket. For this business expense to withstand IRS scrutiny, your children must actually render services and you must pay them reasonable wages.

Another break is that you sidestep Social Security taxes on the wages you pay your children under the age of 18. To qualify for the exemption, you must operate as a sole proprietorship, meaning the lone owner of a full-time or part-time business that's not formed as a corporation or partnership, or do business as a husband-wife partnership. Put another way: No exemption for a family business that's incorporated or a partnership with a partner other than a spouse.

Write-offs for wages paid to children and outlays for computers and other business expenses enable self-employed people to save more than just income taxes – they also reduce self-employment taxes.

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