Online Tax Planning Letter

A Full Service CPA Firm

Focus on family-friendly tax rules

Many of today’s tax rules were designed with families in mind. For instance, if you and your spouse are both employed, you may be eligible for a child care tax credit of up to $2,100. Your children must be under age 13, and the care must be necessary for you to be employed or attend school full-time.

You’re probably already familiar with dependent exemptions for your children. But did you know adult relatives can also be claimed as dependents? To qualify, your relative’s income must be under $4,000, and you have to provide more than 50% of their support. Surprisingly, a relative doesn’t have to live with you. However, unrelated adults who meet the income and support test are required to live with you for the whole year.

Medical costs of adult dependents are also deductible. As a general rule, the combined out-of-pocket health care costs of you, your spouse, and your dependents are deductible to the extent the costs exceed 10% of your adjusted gross income. You can also use your flexible spending account to cover medical expenses of qualifying adult dependents.

One more medical expense-related tax saver is “ABLE” accounts (the acronym stands for Achieving a Better Life Experience). These tax-exempt savings accounts can be used to pay qualified expenses for you or your family members who became blind or disabled before age 26. The maximum allowable contribution to ABLE accounts is $14,000 per yearend_pg3year.

Your family can shoulder some of your tax burden too. Consider maximizing the annual gift tax exclusion by transferring as much as $14,000 to each family member. Investment income after the transfer will be taxable to your family members, who may have a lower tax rate than you do. This “income shifting” can be important if you’re subject to the 3.8% net investment income surtax that comes into play when your adjusted gross income exceeds $250,000 ($200,000 for single filers).

A caution: When making gifts, be aware of the “kiddie tax.” Children under age 18 with unearned income of more than $2,100 might be taxed at your rate instead of their own. Unearned income includes interest, dividends, and capital gains. The rules also apply to full-time students under age 24 who still depend on you for most of their support.

You can skip the kiddie tax problem by making payments of tuition or medical costs of another person directly to the billing institution. These gifts are also excluded from the gift tax calculation.

Another way to avoid the kiddie tax: If you’re a sole proprietor, you can put your children on the payroll. Earned income is not included in the kiddie tax calculation.

For details on these and other year-end tax-saving strategies, please call our office.

NOTE: This newsletter is published annually to provide you with information about minimizing your taxes. Do not apply this general information to your specific situation without additional details. Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that cannot be summarized easily. For details and guidance in applying the tax rules to your individual circumstances, please contact us.