Is your teenager looking for a job for the summer? Hiring him or her to work in your business not only provides a little income for your child, but it can result in several tax and financial benefits.
For starters, wages your child earns are tax-free up to the standard deduction amount of $6,350 in 2017. Furthermore, any excess is generally taxed at just 10 percent. In comparison, additional amounts you receive from your business as compensation are taxed at your top marginal tax rate — which could be as high as 39.6% — while dividends are generally taxable at 15 or 20 percent if you’re in the top tax bracket.
Under the “kiddie tax” rule, unearned income above $2,100 received in 2017 by a child under age 19, or a full-time student under age 24, is taxed at the parents’ top tax rate. But wages aren’t treated as unearned income, so there are no kiddie tax concerns here.
If your child is under age 18 and works for your unincorporated business, the earnings are exempt from FICA tax. An exemption also applies to Federal unemployment tax up until the age of 21. This creates tax savings when the parent employing the child is self-employed or in a partnership.
Your child may also benefit from fringe benefits such as an employer-provided 401(k) or other qualified retirement plan. Similarly, he or she may contribute to an IRA on a deductible basis in combination with or instead of the company plan. Finally, the wages paid to your child are deductible by your business – just like they are for every other employee.
Of course, this arrangement might put a strain on family relations, so factor the personal aspects, as well the tax breaks, into the equation.
If you’re paying for a child to attend college or graduate school, the tax law provides two valuable tax credits that may benefit your tax situation. The two credits are the American Opportunity Tax Credit and the Lifetime Learning Credit.
- American Opportunity Tax Credit (AOTC): In its current form, the maximum annual AOTC of $2,500 may be claimed for each student in the family for up to four years of study. For example, if you have three kids in school in the same year, the maximum credit is $7,500. However, for 2017 the credit phase-out occurs between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers and $160,000 and $180,000 for joint filers. It is available for qualified expenses like tuition and books, but not room and board.
- Lifetime Learning Credit (LLC): The LLC is a $2,000 credit, compared to $2,500 for the AOTC, and applies on a per-taxpayer basis. Therefore, if you have three kids in school in the same year, the maximum credit is still only $2,000. However, the LLC can be claimed for an unlimited number of years. The phase-out range for the LLC is even lower than the one for the AOTC. For 2017, it’s $55,000 to $65,000 of MAGI for single filers and $112,000 to $132,000 for joint filers. The credit can help pay for undergraduate, graduate, and professional degree courses, as well as courses to improve job skills.
Which credit is best?
It may not be easy to determine on your own which credit is best for your family’s situation. While on the surface the AOTC seems to provide the highest tax benefit, it is not always the case. For instance, it’s sometimes possible for you to claim both credits on the same tax return as long as it’s not for the same student or same qualifying expenses. You do not need to make this decision alone. To help decide which credit or combination of credits will bring you the most tax benefit, give Carl Heinemann, your Chattanooga CPA, a call.
In this economy, if you have good credit, a steady job, and several thousand dollars for a down payment, you’ll likely find a financial institution willing to lend you money for a mortgage. Simply fill in the blanks in an online mortgage affordability calculator to get a ballpark estimate of how much you may be able to borrow.
But online calculators don’t tell the whole story. That’s why you need to dig deeper. Scrutinize all the factors that could influence your home buying decision, some of which may be hard to quantify. Above all, don’t sign a long-term mortgage contract until you’ve asked and answered the following two questions.
Should I save for a larger down payment?
You may find a house that sells for $200,000 and a lender who will let you make a 10 percent down payment. Under that scenario, you would owe $180,000 initially (disregarding closing costs and other fees). But let’s say you choose to wait and save enough cash to make a 20 percent down payment on the same home. Your initial mortgage balance would be $160,000. Comparing these two scenarios and assuming an annual interest rate of 4 percent on a 30-year mortgage, a larger down payment would mean a smaller principal and interest payment each month (about $95 less). In addition, you’d save over $14,000 in interest over the term of the loan and could avoid paying for private mortgage insurance (PMI), which is usually required for borrowers who cannot put 20 percent down. PMI fees vary from around 0.3 percent to about 1.5 percent of the original loan amount per year.
What percentage of my take home pay will be locked into house payments?
Remember, you’ll be making mortgage payments every month for years. With that in mind, try to limit your house payment (including taxes and insurance) to 25 percent of your take-home pay. Homes are expensive to maintain. You’ll need cash to cover utilities, maintenance, and repairs. Many Americans fall into the trap of being house rich and cash poor. They resort to credit cards and personal loans for all sorts of ongoing expenses: food, transportation, insurance, health care, and emergencies. Don’t make that mistake. Build room in your budget for house payments and the routine costs of living.
If you have questions about mortgage affordability, please don’t hesitate to call Carl Heinemann, your Chattanooga CPA.
According to the Small Business Administration, about half of all newly established businesses last five years or more. Only a third survive to the ten-year mark. For a variety of reasons, companies that possess the stamina and skill to endure the early years of growth sometimes flounder as the business matures. Why? In all too many cases, business owners disregard four warning signs.
Core business distraction
You start a business with a great idea. It catches on. Orders start rolling in and profits climb. But somewhere along the line you get distracted. You start diverting resources and time to other pursuits. An example of a company diverting resources comes with the history of the Boeing Company, one of the world’s largest aircraft manufacturers. In the aftermath of World War I, Boeing built furniture and watercraft to bolster its bottom line. What if, during that season of dwindling revenues, the company had diverted all its limited resources toward sideboards and sailboats? Maybe we wouldn’t be boarding Boeing jetliners today.
Excessive employee turnover
If you’re routinely replacing and training new staff, you may be headed for trouble. Besides the added cost of recruiting, interviewing, and educating new employees, high staff turnover can adversely impact customer service and sales. Too many unhappy customers and your once-thriving business may begin to falter.
Cash flow setbacks
It’s great that your profit-and-loss statement shows an upward trend in net income. But that’s not the whole story. The cash flow statement is often a better tool to diagnose your company’s overall financial health. It shows how much money is coming into the business and where the funds are being spent. For example, you might have an aggressive sales staff that racks up orders. But if customers aren’t paying their invoices in a timely fashion, you may struggle to cover payroll and accounts payable. As the old saying goes, “Cash is king.” Uncollected accounts receivable won’t pay the bills.
Technologies come and go. Customer needs fluctuate. Today’s hot-selling product becomes tomorrow’s obsolete inventory. It’s true that determination and drive are crucial to the success of any business. But if those traits lead to inflexibility in the face of changing conditions, the company may be headed toward bankruptcy.
If you have further questions about strengthening your company’s long-term prospects, call Carl Heinemann, your Chattanooga CPA and let’s have a conversation.