Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Mixing business and family could prove to be a great way to substantially cut your taxes

- by Alan Duvall 

Published in Dayton Daily News August 6, 2006 

How many times have you heard someone moan, “Gosh, imagine how much money I’d have if I’d only stayed single?”  Fortunately, tax law can at least offer some solace by turning family members into potential tax shelters for the primary breadwinner. 

Let’s set the stage.  Breadwinner owns a Business (offering a SIMPLE pension plan), is over 50 years of age, married with three minor children.  Breadwinner earns enough to gratuitously hand Uncle Sam 40 percent income as taxes. 

ACT 1 - Spouse emerges as first shelter prospect.  If Business pays Spouse $13,500 annual wages for services rendered – Spouse can eliminate $12,500 income from family tax by contributing $10,000 to the SIMPLE plan plus another $2,500 “catch-up” contribution (for the honor of being an AARP member).   

The taxable $1,000 take-home pay is needed for family to qualify for the $650 Ohio joint filing credit, the maximum if both spouses earn taxed income of at least $600.  More Spousal wages would allow for a $4,000 IRA contribution, non-deductible in this case due to the level of family income. 

The net result of Spousal Stage 1 planning – family savings of $5,000 per year simply due to Spousal wage allocation of $13,500. 

The family may consider a limit to Spousal wages, however, due to sneaky FICA taxes.  To illustrate, assume family business earns $180,000 income per year.  If each spouse receives $90,000 wages, family pays approximately $28,000 FICA.  Alternatively, if Breadwinner earns $166,500 and Spouse receives $13,500 pay – family only pays $18,000 FICA – a savings of $10,000 FICA per year.   

ACT 2 – Kids go to work.  Minors can each earn at least $5,000 each year federally tax-free.  In addition, each child would be eligible to contribute deductible funds to the SIMPLE plan ($10,000) as well as an IRA ($4,000).  If Breadwinner’s business is unincorporated, the children’s wages may not even be subject to imposition of FICA taxes. 

Conclusion – each child could earn up to $19,000 annual wages and it's virtually tax free.  Three kids at $19,000 each generates $57,000 tax-free income to the family ordinarily taxed at 40% to the parents – family savings of nearly $22,000. 

Reference to tax law has forever changed the view of Breadwinner’s family perspective.

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.