No matter what the makeup of your family, smart tax planning can help you keep more of your money and avoid unnecessary payments to the government. Everyone needs to pay their fair share of taxes, but paying more than you need to is just plain foolish.
Many people think that family tax planning is only important for those in the highest tax brackets, but that is not necessarily the case. While tax planning for high income individuals is very beneficial, all families can benefit from the right tax planning strategies.
Distributing Income to Reduce Your Marginal Tax Rate One of the smartest ways to lower your taxes and build wealth for the family is to distribute some of your income to other family members. There are a number of ways to accomplish this goal, and they can all be very effective under the right circumstances.
#1 - Put the Kids to Work If you run your own business, hiring your children to help out can provide them (and you) with important benefits. Your children get earned income they can use to start an IRA and put cash aside for the future. You get a tax break and a chance to lower your taxable income, and since your children are in a lower tax bracket this strategy lowers the overall marginal tax rate of the family.
#2 - Smart Stock Investing You can employ a similar strategy to lower the marginal tax rate on capital gains and stock market investments. If nonqualified stock options are part of your overall income, putting some or all of those options into a trust for your children can lower your marginal tax bracket and keep more money in the family.
#3 -- Gifts Giving gifts to charities, family members and other deserving individuals can reduce your tax liability and help your family minimize its tax bill. If you have a child or grandchild in school, you can make direct payments to the educational institution on behalf of that family member. Those direct payments are good for the entire family; you can get a significant tax break while your child or grandchild gets a great education and an excellent head start in life.
#4 - Health Savings Accounts Staying healthy is important, but the cost of health insurance is enough to make you sick. You can save money on premiums by choosing a high-deductible health plan and coupling it with a health savings account. Funding an HSA is a great way to lower your tax bill and ensure you have the funds you will need should a serious medical problem arise.
#5 - Check the Earned Income Tax Credit You may think that the earned income tax credit is only for families on the brink of poverty, but that is not necessarily the case. Even if you do not think your family qualifies, you owe it to yourself to check your eligibility. You can find earned income tax credit calculators online, and many popular tax preparation software packages include eligibility guidelines as well.
These are only a few of several tax planning options designed to avoid unnecessary tax exposure. To schedule a consultation to discuss the full suite of tax strategies tailored to your family circumstances, contact us at 925-977-7784.