Have you started your tax planning?
To really make a difference on your refund or how much you owe for 2013, start thinking about taxes before the year ends.
Take a look at these tax planning strategies and see which ones can help you:
1. Pay your child
If you have a business, one way you can legitimately reduce your tax bill is to pay your kids to work in the business.
Your kids learn the value of work and earning money, and they generally pay less tax on the income than you would, because they are probably in a much lower income tax bracket.
If you employ your child in your unincorporated business, you don’t have to pay or withhold FICA tax (Social Security and Medicare) on your child as long as the child is under age 18.
If you pay your child for domestic work (household chores), you don’t have to pay or withhold FICA tax as long as he or she is under age 21.
You don’t have to pay FUTA, federal unemployment tax, in either case as long as your child is under age 21.
You don’t have to worry about the “kiddie tax” when you pay your kids to work. The kiddie tax does not apply to earned income.
Make sure your kids can actually do the work they are being paid for, and that the amount you pay them is reasonable.
You can generally only deduct payments made to your kids to work in your business, and you must actually make the payments.
2. Make cash and noncash contributions by December 31
If you have kids, you probably have a constant supply of outgrown clothing and forgotten toys. Get a fresh start for the new year – and a great tax deduction – by hauling it to a charitable thrift shop.
Don’t forget to ask for a receipt, and make notes about what you donated.
If you donate something worth more than $250, you’ll need a statement from the charitable organization describing the item (but not a valuation) and whether you received anything in value in return for the contribution.
TaxACT Donation Assistant can help you maximize your deduction for non-cash donations.
If you’re making cash contributions to your favorite charities, including organizations your children may be involved in, consider stepping it up at the end of the year.
You’re going to contribute anyway – why not write a check or put a contribution on your credit card by December 31?
3. Consider giving a portion of large gifts to children before the end of the year
If you want to give a large gift to your child – more than $14,000 (in 2013) – consider spreading the gift out over two or more years to avoid having to file a gift tax return.
For example, say you want to give your daughter $20,000 to use as a down payment on a house.
If you give it to her all at once, you must file a gift tax return. If you give her $10,000 in December, and another $10,000 in January, you’re below the limit for both years.
4. Make sure you know who is claiming the child as a dependent for the year
The parent who lives with the child for more than half the year is allowed to claim the dependency exemption for the year on his or her tax return, unless the custodial parent relinquishes the right to take the dependency to the other parent.
In addition, if you provide a home for at least one dependent for more than half the year, you can file as a head of household instead of as single. You’ll generally pay less tax filing as head of household.
What kind of work would you be willing to pay your kids to do?