All in the Family Tax 2016

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All in the Family Tax 2016

As summer approaches, you may be thinking about hiring one of your children to work in the family business. It can be a good move for both you and your child. You could benefit from a reduction in taxes, while your child has a chance to earn a paycheck and develop valuable workplace skills.

 SAVING TAXES

Hiring your child to work in the family business is a smart strategy from a tax perspective. Since your child is a minor he or she can qualify as a deduction from your business income, which would otherwise be taxed at your own rates.

If you are a sole proprietor, or operate a partnership with only your spouse, wages paid to your child would be exempt from Social Security and Medicare (FICA) taxes until your child turns 18 and from federal unemployment taxes until age 21.

Your child can offset what wages he or she earns with the standard deduction, which is $6,300 for 2016. Wages your child earns beyond the standard deduction will be taxed at his or her lower rates. Most likely, your child’s taxable income would fall in the 10% bracket, which applies to taxable income of $9,275 or less (in 2016).

 UNDERSTAND THE REQUIREMENTS

Any work your child does must be ordinary and necessary for your trade or business. Your child’s wages must also be “reasonable” in relation to the services performed. For example, paying your child $2,500 a week to answer the company’s phones is unlikely to fly with the IRS.

Have your child sign a written employment agreement that specifies his or her duties, hours, and wages. You then have documentation if the IRS ever questions the nature of your child’s work. Your child should be paid by check, not cash, and the check should be deposited in a bank account in his or her name.

Congress Extends Many Tax Breaks

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At the end of last year, Congress continued its tradition of passing an “extender package.” Typically, the year-end packages extend various tax benefits for one year only, but this most recent legislation, the Protecting Americans from Tax Hikes (PATH) Act of 2015, extended many benefits for longer periods, and in some cases—permanently.

Individuals

The following are some of the more important provisions affecting individual taxpayers:

State and local sales taxes

The new law permanently extends a provision allowing taxpayers to take an itemized deduction for state and local sales taxes rather than state and local income taxes. This provision may be useful to individuals who live in states with no income tax, or who have purchased an expensive item such as a car.

American Opportunity Tax Credit

Also made permanent is a tax credit of up to $2,500 per year for the payment of qualified tuition and related expenses for the first four years of post-secondary education. The credit is subject to phase out based on income level.

Higher education expense deduction

This provision allows eligible individuals to deduct up to $4,000 or $2,000 (depending on income) of qualified tuition and related expenses. The deduction is “above the line,” so taxpayers do not need to itemize to take it. The deduction is extended for 2015 and 2016.scissors

Nontaxable IRA charitable transfers

Under this now permanent provision, individuals age 70 ½ or older may exclude up to $100,000 per year from gross income for direct transfers from their individual retirement accounts to qualifying charities. If all requirements are met, such contributions also count toward the taxpayer’s required minimum distributions.

Businesses

Among other changes, the PATH Act of 2015 provides more generous write-offs for qualifying fixed asset purchases. One inclusion is the Higher Section 179 limit. Effective for the 2015 tax year, the new law makes permanent the $500,000 limit on the cost of machinery, equipment, and other eligible property that businesses may expense each year. The election is subject to a dollar-for-dollar phase out once the cost of expensing-eligible property exceeds $2,000,000.

Also included is the “Bonus” first-year depreciation. Thanks to the new law, businesses will continue to have the option of deducting 50% of the cost of qualifying property (e.g., most machinery and equipment) in the year the property is placed in service. The 50% “bonus” depreciation percentage is available for 2015, 2016, and 2017. The percentage drops to 40% in 2018 and to 30% in 2019.