Taxes can be stressful. The last thing your clients, who probably wear multiple hats, want to do is send more of their hard-earned money to the government. Fortunately, various tax reduction techniques are available to help your clients lower their taxable liability.
Consider some of the strategies listed below if your clients want to reduce their children’s taxes.
By hiring their kids, your clients can save their federal taxes by up to 37%, and they’ll also get an extra set of hands. Regardless of the child’s age, if they make the standard deduction of $12,950 or less, federal income tax is not due on their salary. However, depending on the state’s threshold, the client’s child might be required to pay state income tax. If the child receives any additional income in addition to what they make from working for your client, it may be taxed if it causes them to exceed the standard deduction limit. Keep in mind that hours worked and remuneration must be appropriate for the position. What’s more, If the client owns a sole proprietorship, a limited partnership, or a partnership between parents, and the child is under the age of 18, Medicare and Social Security taxes won’t be due.
Your client’s children should contribute to a Roth IRA (Individual Retirement Account), regardless of whether they work for their parents or find a summer job. Because retirement withdrawals are tax-free and money can grow tax-free, this is a great chance to teach kids how to save their money. Although there is no tax benefit in the year of contribution, it is quite advantageous not to have to pay taxes in the future as the account balance increases. In 2022, Roth IRA contributions from individuals under 50 are capped at $6,000 annually.
The Federal Insurance Contributions Act (FICA) is a United States federal payroll contribution directed towards both employees and employers to fund Social Security and Medicare.
FICA taxes amount to 7.65% in total, and if a client’s child gets a college job, they may be able to make money without contributing to Medicare and Social Security. The FICA tax does not apply to some services provided at the college where the child is enrolled. If your client’s child is interested in working throughout their time in college, suggest that they should encourage their child to seek employment in that college in order to save $7.65 on every $100 they make potentially.
Ask your client if they have ever paid for or are now paying for summer camp or other child care for a child under the age of 13. A dependent care tax credit may be claimed at the state, and federal levels provided the child meets the eligibility requirements.
For before-school programs, after-school programs, day camp, daycare, and preschool, they can deduct up to $1,050 for a single child or $2,100 for several children. However, you should look up the state laws before you advise your client in this regard. Unless the client’s adjusted gross income exceeds a specific limit, tax credits are available up to 35% of tuition costs with a limitation of $3,000 for a single child and $6,000 for multiple children.
Starting a college savings plan is a great idea, and customers who haven’t started saving yet can open a Savings 529 plan. Contributions could be tax deductible at the state level, although they are not at the federal level. But if your clients utilize the money to pay for tuition or other educational costs, the growth is completely tax-free.
Every year, college tuition prices climb, but your clients can reduce these costs by utilizing one of the following credits.
The AOTC offers a yearly credit of up to $2,500 per eligible student for qualified education-related expenses paid in their first four years of higher education. A refund of up to $1,000 can be given for 40% of the remaining credit if it reduces your client’s taxes to zero. For each student, the credit is worth 100% of the first $2,000 in eligible educational expenses and 25% of the following $2,000 in eligible expenses.
The LLC is for students enrolled in a qualified educational institution’s qualified tuition and other relevant costs. Clients may use the credit to pay for the cost of undergraduate, graduate, and professional degree programs, as well as programs that can help them develop or gain work skills. Your clients can claim it in any qualifying year, and the maximum value of the credit is $2000. Each year, clients are limited to one tax credit claim, so your clients should take into account the advantages and disadvantages of each to choose the most advantageous course.
Tax planners frequently invest a lot of effort in assisting their clients in saving money. Helping your clients lower their children’s tax obligations is one valuable option. Assisting them in reducing their debt is another.
Tax savings can be put to a variety of uses. Think of them as accumulated savings rather than extra money to spend. To improve their overall financial health, they should use the funds to pay off their debt. When advising your clients on how to get out of debt, keep in mind that debt restructuring could be an excellent option for them. A business facing financial challenges may be able to continue operating by restructuring its debt.