Month: August 2023

If you own your own business and operate as a proprietorship or partnership (wherein your spouse is not a partner), one of the smartest tax moves you can make is hiring your spouse to work as your employee.

But the tax savings may be a mirage if you don’t pay your spouse the right way. And the arrangement is subject to attack by the IRS if your spouse is not a bona fide employee.

Here are four things you should know before you hire your spouse that will maximize your savings and minimize the audit risk.

1. Pay benefits, not wages. The way to save on taxes is to pay your spouse using tax-free employee benefits, not taxable wages. Benefits such as health insurance are fully deductible by you as a business expense, but not taxable income for your spouse.

Also, if you pay your spouse only with tax-free fringe benefits, you need not pay payroll taxes, file employment tax returns, or file a W-2 for your spouse.

2. Establish a medical reimbursement arrangement. The most valuable fringe benefit you can provide your spouse-employee is reimbursement for health insurance and uninsured medical expenses. You can accomplish this through a 105-HRA plan if your spouse is your sole employee, or an Individual Coverage Health Reimbursement Arrangement (ICHRA) if you have multiple employees.

3. Provide benefits in addition to health coverage.There are many other tax-free fringe benefits you can provide your spouse in addition to health insurance, including education related to your business, up to $50,000 of life insurance, and de minimis fringes such as gifts.

4. Treat your spouse as a bona fide employee. For your arrangement to withstand IRS scrutiny, you must be able to prove that your spouse is your bona fide employee. You’ll have no problem if:

• you are the sole owner of your business,
• your spouse does real work under your direction and control and keeps a timesheet,
• you regularly pay your spouse’s medical and other reimbursable expenses from your separate business checking account, and
• your spouse’s compensation is reasonable for the work performed.

If you have any further questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 9, 2023

As an owner of a corporation and an employee within that corporation, you may be eligible for a home-office deduction if

• you use the office in your home for the convenience of your employer corporation,
• you comply with the tax code rules for deducting a home office, and
• your corporation reimburses you, the corporate employee, for your home-office expenses.

It’s important to note that your home-office deduction opportunity changed with the Tax Cuts and Jobs Act, which discontinued employee business expenses as itemized deductions from 2018 to 2025. But your corporation can claim the deduction by reimbursing you for your home-office expenses.

Although not new, it’s also important to know that if you rent part of your residence to your employer corporation and use this rented space when working for the employer, you cannot deduct these home-office expenses.

You want your home office to qualify as a principal office, even when you have an office downtown. For this to happen, you need to

• use the home office exclusively and regularly for the corporate business,
• do almost all your administrative or management tasks at the home office, and
• use the home office for the convenience of the corporation, not for your personal convenience or comfort.

If your corporation doesn’t maintain an office outside your home office, it is clear that your home office is for the convenience of your employer corporation.

But when you have a downtown office, your use of the office in your home must be for the convenience of the corporation. Various reasons might justify using a home office, including preserving confidentiality, ensuring uninterrupted attention to business planning, or accommodating payables records, invoices, receipts, etc.

Additionally, the corporation should write you a letter mandating that you conduct your administrative or management tasks at home for the corporation’s convenience. This letter, written on corporate letterhead, should be kept in your corporate tax file.

If your home office qualifies as a principal office, there are numerous benefits, such as:

• You receive the employee business expense reimbursement as a tax-free fringe benefit.
• Your corporation can deduct the reimbursement as a business expense for office space.
• The home office’s principal-office status can eliminate personal-use commuting mileage, thereby increasing business use and deductions on the business vehicle.
• The home office can generate corporate business deductions from the business percentage of your personal home expenses.

Remember, tax planning is key, and this is just one of the many strategies we can explore to optimize your tax situation. Please call me on my direct line at 408-778-9651 if you have any questions.

• By Leon Clinton
• August 4, 2023

I wanted to take this opportunity to touch base regarding the federal income tax rules on the “kiddie tax” and its potential impact on your financial strategy for your child(ren).

In brief, the kiddie tax was enacted by Congress to prevent parents from passing investment income to their children, who typically have a lower tax rate. Under the kiddie tax rules, a portion of a child’s net unearned income may be taxed at the parent’s marginal federal income tax rate. The kiddie tax applies to children up to age 24, assuming they meet certain criteria.

The kiddie tax can result in higher taxes on an affected child’s net unearned income than otherwise would apply. For example, if a child’s net unearned income exceeds the annual threshold of $2,500 for 2023 (increased from $2,300 in 2022), the portion of the income exceeding the threshold is subject to the kiddie tax.

The kiddie tax does not apply if the child’s net unearned income for the year does not exceed the threshold for that year.

There are four primary criteria for the application of the kiddie tax, including the child not filing a joint return for the year, at least one parent being alive at year’s end, the child’s net unearned income for the year exceeding the threshold for that year, and the child falling under specific age rules.

Despite these rules, there are several strategies to limit the kiddie tax’s impact on your child’s unearned income:

Exploit the unearned income threshold. Manage your child’s unearned income to ensure it remains below the annual threshold.

Pick the right investments. You can reduce unearned income by selecting investments with minimal or no dividends, such as growth stocks or tax-efficient mutual funds.

Invest in Series EE U.S. Savings Bonds. The accumulated interest income from these bonds is tax-deferred until cashed in, meaning no kiddie tax applies if cashed in when the child is kiddie-tax-exempt.

Use a Section 529 College Savings Plan. Withdrawals from a Section 529 plan account are federal-income-tax-free, provided they’re used for qualifying education expenses.

Invest in life insurance products. Investment accounts included in life insurance products such as universal life policies allow tax-deferred accumulations and can be borrowed against for college costs.

Generate earned income. The kiddie tax does not apply to children aged 18-23 if their earned income exceeds 50 percent of their support for the year.

The applicability of these strategies depends on your unique circumstances, and I would be delighted to discuss them in more detail to help you optimize your child’s financial situation. If this sounds good to you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 1, 2023