Ann G. Chiang, CPA
Thank you for the opportunity to service you. Thank you for following my retirement plan to save you taxes.
Showing posts with label Tax Laws. Show all posts
Showing posts with label Tax Laws. Show all posts
Monday, April 18, 2011
Thursday, January 27, 2011
Cutting the "Kiddie Tax" Down to Size
Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
The "kiddie tax" is a bit of a misnomer. This tax provision may actually apply to children well into their twenties. Nevertheless, with some advance planning, you can minimize or even eliminate the tax damage.
Basic rules: Income is generally taxed at the tax rate of the individual who receives it. For example, if you are in the 35% tax bracket, your top dollars are taxed at the 35% rate. On the other hand, if your child is in the 10% bracket, the child pays tax at a maximum rate of only 10%.
However, a special rule applies to younger children who receive unearned income above an annual threshold. In this case, the excess is taxed at the top tax rate of the child's parents. Thus, instead of being taxed at the 10% rate, your child may be taxed at the 35% rate on the excess.
The annual threshold is adjusted for inflation, but increases have been small or nonexistent. For 2011, the threshold is $1,900, the same as it was in 2010 and 2009.
Another problem: Initially, the kiddie tax only applied to children under age 14, but the limit has been raised several times. Currently, the age limit is 19, or age 24 for a full-time student if the child doesn't have earned income in excess of half of his or her annual support. In other words, if your dependent child is in college, the kiddie tax most likely still applies.
How can you lessen the impact? Although every situation is different, here are four ideas to consider:
1. Keep your child's unearned income below or near the $1,900 threshold. For instance, you might wait until next year to give your child some income-producing property. This technique works especially well if you do not expect your child to pay the kiddie tax in 2012.
2. Utilize tax-deferred investments that don't produce current income. This may include investments in growth stock and U.S. Savings Bonds. Similarly, if the child buys certificates of deposit (CDs) or Treasuries that will not mature until next year, you can avoid or minimize the kiddie tax for 2011.
3. Allocate a portion of your child's investment portfolio to municipal bonds ("munis") or muni bond funds. Generally, the income received from these investments is completely free from federal income tax, so your child can pocket any amount without kiddie tax worries.
4. Hire your child to work for your company. Because the wages constitute earned income, this will not trigger any kiddie tax complications. As long as the child is paid a reasonable salary for the services performed, your company can deduct the wages. This is a good way to help a child save money for college without adverse tax consequences.
Final advice: Keep one eye on your child's portfolio and the other on the kiddie tax. But take all the relevant factors--not just taxes--into account when you make investment decisions.
The "kiddie tax" is a bit of a misnomer. This tax provision may actually apply to children well into their twenties. Nevertheless, with some advance planning, you can minimize or even eliminate the tax damage.
Basic rules: Income is generally taxed at the tax rate of the individual who receives it. For example, if you are in the 35% tax bracket, your top dollars are taxed at the 35% rate. On the other hand, if your child is in the 10% bracket, the child pays tax at a maximum rate of only 10%.
However, a special rule applies to younger children who receive unearned income above an annual threshold. In this case, the excess is taxed at the top tax rate of the child's parents. Thus, instead of being taxed at the 10% rate, your child may be taxed at the 35% rate on the excess.
The annual threshold is adjusted for inflation, but increases have been small or nonexistent. For 2011, the threshold is $1,900, the same as it was in 2010 and 2009.
Another problem: Initially, the kiddie tax only applied to children under age 14, but the limit has been raised several times. Currently, the age limit is 19, or age 24 for a full-time student if the child doesn't have earned income in excess of half of his or her annual support. In other words, if your dependent child is in college, the kiddie tax most likely still applies.
How can you lessen the impact? Although every situation is different, here are four ideas to consider:
1. Keep your child's unearned income below or near the $1,900 threshold. For instance, you might wait until next year to give your child some income-producing property. This technique works especially well if you do not expect your child to pay the kiddie tax in 2012.
2. Utilize tax-deferred investments that don't produce current income. This may include investments in growth stock and U.S. Savings Bonds. Similarly, if the child buys certificates of deposit (CDs) or Treasuries that will not mature until next year, you can avoid or minimize the kiddie tax for 2011.
3. Allocate a portion of your child's investment portfolio to municipal bonds ("munis") or muni bond funds. Generally, the income received from these investments is completely free from federal income tax, so your child can pocket any amount without kiddie tax worries.
4. Hire your child to work for your company. Because the wages constitute earned income, this will not trigger any kiddie tax complications. As long as the child is paid a reasonable salary for the services performed, your company can deduct the wages. This is a good way to help a child save money for college without adverse tax consequences.
Final advice: Keep one eye on your child's portfolio and the other on the kiddie tax. But take all the relevant factors--not just taxes--into account when you make investment decisions.
Wednesday, December 29, 2010
The Clock Is Ticking: Ten Last-minute Tax Moves
Quick ways to reduce your 2010 tax liability
Although there are precious few days left in the year, it is still not too late to cut your 2010 tax bill. But you may have to move fast. Here are ten prime tax-saving ideas to consider.
1. Capital gains and losses: If you are showing a net capital gain for the year, you may realize losses from security sales to offset the gain, plus up to $3,000 of ordinary income. Conversely, if you are showing a net loss, any gains are tax-free up to the amount of the loss. Reminder: The maximum tax rate on net long-term capital gain in 2010 is 15%.
2. Charitable donations: If you give to charity via credit card, the gift is deductible in 2010 as long as it is posted by the credit card company before the end of the year. It does not matter if you actually pay off the charge in 2011. Make sure that all charitable donations are properly substantiated.
3. State and local taxes: If you prepay next year's state and local taxes, you can increase your current deduction. However, do not prepay if you expect to owe the alternative minimum tax (AMT) this year, because these taxes are not deductible for AMT purposes.
4. Dependency exemptions: If your child is younger than 19, or a full-time student younger than 24, you can generally claim a $3,650 dependency exemption for the child if you provide more than half of his or her support. You might give some end-of-year support--perhaps a generous holiday gift--to push you over the threshold.
5. Medical expenses: Medical expenses are deductible to the extent your annual total exceeds 7.5% of your adjusted gross income (AGI). If you have cleared this threshold in 2010, you can schedule routine medical or dental examinations for December. Otherwise, you might postpone these visits.
6. Miscellaneous expenses: Similarly, you can deduct miscellaneous expenses only to the extent the annual total exceeds 2% of your AGI. Therefore, you might pay certain expenses--like safe deposit box fees or tax advisory fees--to maximize your deduction for 2010.
7. Energy credits: The tax law provides a residential energy credit for certain energy-saving installations made in 2010. If you qualify, you can claim a 30% credit up to $1,500 this year (reduced by the amount of the credit claimed in 2009).
8. 401(k) contributions: There is still time to boost your retirement nest egg by allocating part of your last paycheck to your 401(k) account. If you have cleared the Social Security wage base of $106,800 for 2010, you can use the payroll tax savings without reducing your take-home pay.
9. Hybrid vehicles: If you are in the market for a hybrid vehicle, make your purchase before 2011. You may be entitled to a special tax credit. Caveat: Credits are phased out for several popular models.
10. Mutual funds: Generally, it is beneficial to sell mutual fund shares before the fund declares dividends (the ex-dividend date) to avoid tax. Similarly, you may acquire shares after the ex-dividend date has passed.
Depending on changes in the tax law, you might bypass some of these ideas. Of course, everyone's situation is different. Obtain professional assistance in this area before you take any action.
Although there are precious few days left in the year, it is still not too late to cut your 2010 tax bill. But you may have to move fast. Here are ten prime tax-saving ideas to consider.
1. Capital gains and losses: If you are showing a net capital gain for the year, you may realize losses from security sales to offset the gain, plus up to $3,000 of ordinary income. Conversely, if you are showing a net loss, any gains are tax-free up to the amount of the loss. Reminder: The maximum tax rate on net long-term capital gain in 2010 is 15%.
2. Charitable donations: If you give to charity via credit card, the gift is deductible in 2010 as long as it is posted by the credit card company before the end of the year. It does not matter if you actually pay off the charge in 2011. Make sure that all charitable donations are properly substantiated.
3. State and local taxes: If you prepay next year's state and local taxes, you can increase your current deduction. However, do not prepay if you expect to owe the alternative minimum tax (AMT) this year, because these taxes are not deductible for AMT purposes.
4. Dependency exemptions: If your child is younger than 19, or a full-time student younger than 24, you can generally claim a $3,650 dependency exemption for the child if you provide more than half of his or her support. You might give some end-of-year support--perhaps a generous holiday gift--to push you over the threshold.
5. Medical expenses: Medical expenses are deductible to the extent your annual total exceeds 7.5% of your adjusted gross income (AGI). If you have cleared this threshold in 2010, you can schedule routine medical or dental examinations for December. Otherwise, you might postpone these visits.
6. Miscellaneous expenses: Similarly, you can deduct miscellaneous expenses only to the extent the annual total exceeds 2% of your AGI. Therefore, you might pay certain expenses--like safe deposit box fees or tax advisory fees--to maximize your deduction for 2010.
7. Energy credits: The tax law provides a residential energy credit for certain energy-saving installations made in 2010. If you qualify, you can claim a 30% credit up to $1,500 this year (reduced by the amount of the credit claimed in 2009).
8. 401(k) contributions: There is still time to boost your retirement nest egg by allocating part of your last paycheck to your 401(k) account. If you have cleared the Social Security wage base of $106,800 for 2010, you can use the payroll tax savings without reducing your take-home pay.
9. Hybrid vehicles: If you are in the market for a hybrid vehicle, make your purchase before 2011. You may be entitled to a special tax credit. Caveat: Credits are phased out for several popular models.
10. Mutual funds: Generally, it is beneficial to sell mutual fund shares before the fund declares dividends (the ex-dividend date) to avoid tax. Similarly, you may acquire shares after the ex-dividend date has passed.
Depending on changes in the tax law, you might bypass some of these ideas. Of course, everyone's situation is different. Obtain professional assistance in this area before you take any action.
Tuesday, November 16, 2010
2010 Year End Tax Planning for Businesses:
Tax planning for year-end 2010 presents new challenges for business taxpayers to reduce or defer federal income tax liability. Although traditional planning techniques remain fundamentally important considerations this year, there are new opportunities with recent legislation and changes in the tax laws. In addition, tax planning is complicated when considering the effective dates for many popular tax incentives, and anticipating those tax laws that may be put to a vote in Congress before year's end.
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