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College funding often a good year-end deduction

Many business owners look at the month of December as one last chance to get some tax deductions, which is why equipment purchases and other expenditures are common at the end of the year. There is nothing wrong with taking advantage of year-end tax deductions, but some accountants caution: Don’t spend the money if you don’t have to.

“My general philosophy is, ‘Economics prevails, not tax deductions.’ Don’t buy a new computer if you don’t need it — you’re about to spend $1 to save a quarter,” says Frank Warner, a Certified Public Accountant based in Silverdale.

Warner says if you’re planning to buy the equipment anyway between now and March, it’s a good idea to do it now. Though some businesses also use strategies like deferred billing or paying off bills before Dec. 31, Warner cautions that is not necessarily an advantage.

“The only time it makes sense to shift revenue or expenses is when you know you’ll have a change in the tax bracket . It’s not a simple matter of postponing for postponing’s sake,” he says. For businesses just starting out, it’s especially not a good idea to defer the income into the second or third year.

Warner has a different suggestion for people looking to maximize their deductions: children’s college savings. Business owners who are sole proprietors can hire family members without paying payroll taxes. They can give their children a W2 and take the deduction for wages, and in turn invest that money into an IRA in their name. By using an IRA, the first $9,000 paid to children in wages can be tax-free, though Warner says it would be tough to justify paying a younger child that much — so for 11-14-year-olds, a smaller amount like $3,000-$4,000 per year may be more appropriate. The children can do anything from filing and mailing to office cleaning.

“When they go to school , they can cash in the IRA, and if done right, never have to pay taxes,” he says.

“Get your children beginning at age 11 or 12 on the payroll to satisfy their college funds down the road,” says Warner. “Call your tax advisor to find out how. The big money is not the money you save now — it’s the IRA account that will grow and be tax free.”

Parents who are not business owners can still take advantage of this strategy by hiring their children for domestic help. Although the wages themselves are not tax-deductible, the children will still have the college money tax-free through the IRA.

This year, the so-called “kiddie tax” rule was changed, so parents who could put money into their children’s accounts tax free between the ages of 14 and 19 are now taxed up to age 18 — so the IRA, which does require a W2 for the tax-free advantage, is a good way to get what Warner calls a scholarship. “To me, it’s a big deal,” Warner says.

 
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