Tax

Are you thinking of getting married or divorced? If so, consider December 31, 2024, in your tax planning. 

Here’s another planning question: Do you give money to family or friends (other than your children who are subject to the kiddie tax)? If so, you need to consider the zero-tax planning strategy. 

And now, consider your children who are under the age of 18. Have you paid them for the work they’ve done for your business? Have you paid them the right way?

Here are five strategies to consider as we come to the end of 2024.

1. Put Your Children on Your Payroll

If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you need to consider having that child on your payroll. Why? 

• First, neither you nor your child would pay payroll taxes on the child’s income. 
• Second, with a traditional IRA, the child can avoid all federal income taxes on up to $21,600 of earned income.

If you operate your business as a corporation, you can still benefit by employing the child even though both your corporation and your child suffer payroll taxes.

2. Get Divorced after December 31

The marriage rule works like this: you are considered married for the entire year if you are married on December 31.

Although lawmakers have made many changes to eliminate the differences between married and single taxpayers, the joint return will work to your advantage in most cases.

Warning on alimony! The Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018:

• Under the old law, the payor deducts alimony payments and the recipient includes the payments in income.
• Under the new law, which applies to all agreements executed after December 31, 2018, the payor gets no tax deduction and the recipient does not recognize income.

3. Stay Single to Increase Mortgage Deductions

Two single people can deduct more mortgage interest than a married couple. 

If you own a home with someone other than a spouse, and if you bought it on or before December 15, 2017, you individually can deduct mortgage interest on up to $1 million of a qualifying mortgage. 

For example, if you and your unmarried partner live together and own the home together, the mortgage ceiling on deductions for the two of you is $2 million. If you get married, the ceiling drops to $1 million.

If you and your unmarried partner bought your house after December 15, 2017, the reduced $750,000 mortgage limit applies, and your ceiling is $1.5 million.

4. Get Married on or before December 31

Remember, if you are married on December 31, you are married for the entire year.

If you are thinking of getting married in 2025, you might want to rethink that plan for the same reasons that apply to divorce (as described above). The IRS could make considerable savings available to you for the 2024 tax year if you get married on or before December 31, 2024.

To know your tax benefits and detriments, you both must run the numbers in your tax returns. If the numbers work out, you may want to take a quick trip to the courthouse.

5. Make Use of the 0 Percent Tax Bracket

In the old days, you used this strategy with your college student. Today, this strategy does not work with that student, because the kiddie tax now applies to students up to age 24. 

But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?

If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $47,025 in taxable income and to a married couple with less than $94,050 in taxable income.

If the parent or other loved one is in the 0 percent capital gains tax bracket, you can add to your bank account by giving this person appreciated stock rather than cash.

Example. You give Aunt Millie shares of stock with a fair market value of $20,000, for which you paid $2,000. Aunt Millie sells the stock and pays zero capital gains taxes. She now has $20,000 in after-tax cash, which should take care of things for a while.

Had you sold the stock, you would have paid taxes of $4,284 in your tax bracket (23.8 percent x $18,000 gain).

Of course, $2,000 of the $20,000 you gifted goes against your $13.61 million estate tax exemption if you are single. 

If you’re married and you make the gift together, you each have an $18,000 gift-tax exclusion, for a total of $36,000, and that eliminates the gift tax. But you must file a gift-tax return that shows the government you split the gift.

I know that taxes can cause confusion. Remember, that’s why you have me! I’m always here to be of service. If you want to discuss any of the strategies described above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 12, 2024

Dogs, cats, and other household pets are expensive. Owners spend an average of $1,270 to $2,800 to own a dog. Can you ever deduct these costs from your taxes?

The expenses for a family pet that provides you only with love and companionship are never deductible. They are purely personal expenses.

But it is possible to deduct the expenses for a dog, a cat, or another animal if it qualifies as a

• medical expense
• business expense, or
• charitable deduction.

The costs of buying, training, and maintaining a dog or another animal qualify as deductible medical expenses if you 

• use the animal primarily for medical care, and
• would not have paid the expenses but for the disease or illness involved. 

Medical deductions are allowed for service animals trained to aid their owners with a disability. Examples include guide dogs for people who are blind or have low vision, or dogs trained to carry items for people with physical disabilities.

You can deduct as a medical expense emotional support animals, such as dogs, cats, or other animals that help people suffering from mental or emotional disabilities. Emotional support animals are more challenging to deduct than service animals because they can seem little different from regular pets. The animal should be prescribed (or at least recommended) by a licensed healthcare provider as part of a mental health treatment plan.

You can deduct dogs and other animals as a business expense if they serve a legitimate business purpose. For example, you can deduct security-purpose business-location guard dogs. The guard dog should be trained and should be an appropriate breed for guarding purposes, such as a Rottweiler, German shepherd, or Doberman pinscher. Don’t try to deduct a small dog like a Chihuahua as a guard dog!

Cats have achieved business-deductible status when used for pest control at a business location.

If you foster dogs, cats, or other animals in your home, you may be able to take a charitable deduction for the reasonable expenses you pay out of your own pocket, such as pet food expenses and veterinary bills. You may not deduct the value of the time you spend fostering animals or the value of donating space in your home for this purpose.

To qualify for this deduction, you cannot foster animals on your own. You must do so on behalf of a Section 501(c)(3) charitable organization. You must also obtain a written acknowledgment from the charity if your expenses exceed $250.

If you want to discuss dog or cat deductions, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 8, 2024

Wow, how time flies! Yes, December 31 is just around the corner. 

That’s your last day to find tax deductions available from your existing business and personal (yes, personal) vehicles that you can use to cut your 2024 taxes. But don’t wait. Get on this now!

1. Take Back Your Child’s or Spouse’s Car and Sell It

We know—this sounds horrible. But stay with us.

What did you do with your old business car? Do you still have it? Is your child driving it? Or is your spouse using it as a personal car?

We ask because that old business vehicle could have a big tax loss embedded in it. If so, your strategy is easy: sell the vehicle to a third party before December 31 so you have a tax-deductible loss this year.

Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.

2. Cash In on Past Vehicle Trade-Ins

In the past (before 2018), when you traded vehicles in, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, these rules no longer apply to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)

Whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could still find a significant deduction here.

Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 15 years, during which he

• converted his original personal car (car one) to business use;
• then traded in the converted car for a new business car (car two);
• then traded in car two for a replacement business car (car three); and
• then traded in car three for another replacement business car (car four), which he is driving today.

During the 15 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.

If Sam sells his mileage-rate car today, he will realize a tax loss of $27,000. The loss is the accumulation of 15 years of car activity, during which Sam never cashed out because he always traded cars. (This was before he knew anything about gain or loss.) 

Further, Sam thought his use of IRS mileage rates was the end of it—nothing more to think about (wrong thinking here, too).

Because the trades occurred before 2018, they were Section 1031 exchanges and deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his significant deduction.

To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car four, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.

Examine your vehicle for this possible loss deduction. Did you procure the business vehicle you are driving today in 2017 or earlier? Did you acquire this vehicle with a trade-in? If so, your tax loss deduction could be big! 

3. Put Your Personal Vehicle in Business Service

Lawmakers enacted 80 percent bonus depreciation for 2024, creating an effective strategy that costs you nothing but can produce substantial deductions.

Are you (or is your spouse) driving a personal SUV, crossover vehicle, or pickup truck with a gross vehicle weight rating greater than 6,000 pounds? Would you like to increase your tax deductions for this year?

If so, place that personal vehicle in business service before December 31.

4. Check Your Current Vehicle for a Big Deduction

Your current business vehicle, regardless of when it was purchased, could have a big deduction waiting for you.

Example. Jim purchased a $60,000 vehicle in 2021 and used it 85 percent for business. During the four years he used it (2021, 2022, 2023, and 2024), Jim depreciated the vehicle $10,000. If Jim sells the vehicle today for $25,000, Jim has a $19,750 tax loss. 

If you see opportunities for deductions that you would like to discuss with me, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 7, 2024