Funeral expenses can’t be deducted

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On their joint tax return, a married couple deducted $27,400 in funeral and estate administration expenses they’d paid after the wife’s father died. The IRS denied the deductions and the U.S. Tax Court agreed. “Funeral expenses are clearly personal or family expenses” that are nondeductible, the court stated. The taxpayers said they’d relied on various IRS publications in claiming the deductions. The court explained their reliance on the publications was “misplaced” because they discussed different expenses.

Hire your children to save taxes for your business and your family

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It can be difficult in the current job market for students and recent graduates to find summer or full-time employment. If you’re a business owner with children in this situation, you may be able to provide them with valuable experience and income while generating tax savings for both your business and your family overall.

Shifting income

By moving some of your business earnings to a child as wages for services performed by him or her, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the salary as a business expense, the work done by the child must be legitimate, and the child’s wages must be reasonable.

Here’s an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work full-time during the summer and part-time into the fall. The son earns $6,100 during the year and doesn’t have any other earnings.

The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the extra income from tax by making a tax-deductible contribution to his own IRA.

Family taxes will be cut even if the employee child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Saving employment taxes

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes. And a similar exemption applies for federal unemployment tax (FUTA) purposes. It exempts earnings paid to a child under age 21 while employed by his or her parent.

If you have questions about how these rules apply in your particular situation or would like to learn about other family-related tax-saving strategies, contact us.

Tax breaks may be available to grandparents

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Grandparents in the challenging situation of raising their grandchildren should know that some tax breaks may be available to ease the financial burden of becoming primary caregivers for grandchildren. These may include head of household filing status, exemption for the child, the earned income credit, the child tax credit, the credit for child and dependent care expenses, credits or deductions for qualified education expenses, qualified medical and dental expense deductions, the adoption credit and state tax breaks.

No leg to stand on

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U.S. citizens must generally file a Report of Foreign Bank and Financial Accounts (FBAR) if they have an account in a foreign country and meet certain requirements. Failure to file an FBAR can result in penalties as high as the greater of $100,000 or 50% of the unreported balance if the failure was willful. When one taxpayer was hit with an FBAR penalty of $1.36 million, he demanded the IRS provide “clear and convincing evidence” that the failure was willful. The Fifth Circuit ruled he lacked standing to enforce his demand. (3/13/16, 2017-532)