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When it comes to taxes, children are typically in lower income tax brackets in the USA. That is why many wealthy parents would shift income-producing assets to their children’s names to avoid paying taxes at their top marginal tax rates, up to 37%.

But the Tax Reform Act of 1986 changed it all. The new act requires a child’s unearned income above a specific threshold to be taxed at the parent’s tax rates. As a result, ‘Kiddie Tax’ was born.

Despite its sweet-sounding moniker, the “kiddie tax” is an often-misunderstood tax provision that can result in sizable income tax liability for your family. So, it is important to understand what kiddie tax is and how to avoid it from tax services San Bernardino.

If your child has an unearned income, it is a tax you should be aware of.

What is Kiddie Tax?

Kiddie Tax was introduced to deter wealthy parents from pushing certain incomes into their children’s lower tax rates. This tax provision has seen many revisions. As of 2023 kiddie tax rules, a minor’s unearned income typically includes:

• Capital gains distribution
• Dividends
• Interest income
• Taxable scholarships
• Income in custodial accounts under the Uniform Gifts to Minors Act (UGMA)
• Income produced by gifts from grandparents

Under the current IRS rules for 2023, the unearned income threshold is $2,500 (up from $2,300 in 2022). The first $1,250 of a child’s unearned income is earned tax-free, and the next $1,250 is taxed at the child’s rate. Anything over $2,500 for 2023 is taxed at the parent’s tax rate instead of the child’s lower tax rate.

The child’s age is the most important factor in determining Kiddie Tax.

• Kiddie Tax does not affect anyone age 24 or older at year-end.
• For those aged 19–23 at year-end, the tax can apply only if s/he is a full-time student for that year and his/her earned income (say from a part-time job) is ≤ 50% of his/her support.
• A child age 18 or under at year-end is almost always exposed to Kiddie Tax if the child’s net unearned income surpasses the annual threshold.

The tax rules can be even more complicated if your child also has earned income. For more information, see IRS Publication 929 or consult an experienced tax advisor.

How to Calculate Kiddie Tax

Kiddie Tax for tax year 2023 will be filed in 2024. To calculate the tax amount, you have to first determine the child’s taxable income:

Families with unearned income subject to Kiddie Tax have to file IRS Form 8615 along with their federal tax return. Children with unearned income exceeding $13,850 or any earned income must file a distinct tax return. However, if a child’s unearned income falls below $13,850 but exceeds $1,250, it may be incorporated into their parent’s income tax return.

Let us walk you through an example of calculating Kiddie Tax for a child in 2023:

Suppose a child named Alex is 16 years old at the end of 2023. Alex has unearned income from investments, such as interest and dividends, totaling $3,000 for the year. Also, Alex has no income from a job or any other source.

Since Alex has $3,000 in unearned income, we will calculate the tax on the portion that exceeds $2,500. Unearned income subject to tax = $3,000 – $2,500 (threshold) = $500. There will be tax at Alex’s tax rate on the $500 of unearned income above the threshold.

Since Alex is under 18 years old, and the unearned income is within Kiddie Tax threshold, we will calculate the tax using the child’s rate. Let us assume the child’s tax rate is 10% in this example.

So, Kiddie Tax on the $500 of unearned income = $500 (unearned income) * 0.10 (tax rate) = $50

Being a parent, you might wonder how to avoid Kiddie Tax. Keep reading to know.

2023 Tax Planning and Kiddie Tax

Net unearned income calculation depends on whether the child itemizes deductions or not. But it cannot exceed the child’s taxable income.

If the child does not itemize:

Net unearned income = Child’s unearned income for the year – (2 X Limited standard deduction for dependents)

Two times the limited standard deduction for dependents is $2,500 for 2023 and $2,300 for 2022.

If the child itemizes deductions:

Net unearned income = Child’s unearned income for the year – (larger of the following:)

• the limited standard deduction for dependents ($1,250 for 2023 and $1,150 for 2022), plus the portions of the child’s itemized deductions that are directly connected with the production of unearned income; or
• two times the limited standard deduction for dependent ($2,500 for 2023 and $2,300 for 2022).

The parents may elect to include on their return the child’s unearned income to avoid the kiddie tax. For the election, parents have to fill the Form 8814.

Making these calculations without tax services Rancho Cucamonga CA can be tricky. At GNS-CPAS, our tax experts can make these calculations for you and help with 2023 tax planning.

Ways to Avoid Kiddie Tax

Fortunately, there are some ways to avoid the potential exposure to Kiddie Tax. However, we do not encourage tax avoidance as the primary reason for tax planning.

Now, let us check out some ways to avoid Kiddie Tax:

Invest in Tax-Efficient or Tax-Exempt Assets

Consider investments that generate tax-efficient income, such as growth stocks that don’t pay dividends or tax-exempt municipal bonds. This can help keep your child’s unearned income below the Kiddie Tax threshold.

Similarly, kiddie tax does not include tax-exempt interest. So, choose tax-exempt assets such as bonds, notes, bond funds, leases, mutual funds, life insurance, and trusts.

Harvest Capital Losses

Capital losses often result in lower unearned income. If the loss brings the unearned income below the annual threshold, Kiddie Tax does not apply.

Open Your Child’s Roth IRA Account

If your child does not earn income, s/he may qualify for a Roth IRA account. This has many benefits. For the 2022 tax filing year, you can add $6,000 to your child’s Roth IRA, and this contribution reaches $6,500 for 2023.

The contribution amount cannot be greater than the child’s earned income. But this is a great way to transfer thousands of dollars to your child yearly.

The income earned within the Roth IRA is tax-deferred. In addition, the investment income accumulated within the Roth IRA will be tax-free when the account holder reaches age 59 ½ and holds a Roth plan for at least five years. Plus, you can withdraw contributions to a Roth IRA plan at any time without tax consequences.

529 College Savings Plans

The 529 plan lets you transfer the largest amount of money to your child while avoiding Kiddie Tax or tax consequences. These plans allow parents and grandparents to fund a child’s education.

There are no income restrictions for contributors! There is no limit on contributions! However, you can limit contributions to the federal gift tax threshold amount to avoid the gift tax.

Investment income in a 529 plan is tax-free. You have no tax obligations on the distribution as long as you use the funds for the child’s qualified education expenses.

Monitor Earned Income

Be aware that Kiddie Tax rules consider both unearned and earned income. If your child has a part-time job, ensure their earned income remains below the thresholds.

Do Kiddie Tax Rules Apply to You? Let us Help You.

At GNS CPAS, our certified accountants believe that you deserve a smooth, hassle-free, and stress-free tax treatment. Over the years, we have helped many parents like you who need to report their children’s earned and unearned income.

Schedule a call with our tax experts and see how we can help you.

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Tax planning is a vital tool for managing your financial landscape. It’s not just about reducing your tax liability for the current year but also about planning for future years. Understanding the nuances, such as the timing of income and deductions, can lead to significant tax savings.

What is Tax Planning?

Tax planning is the process of reviewing various options for conducting business and personal transactions with the aim of reducing tax liability. It involves making decisions on the timing and method of completing transactions as well as the reporting of income, deductions, and credits.

The primary goal is to minimize income taxes as much as legally possible. Tax planning is considered an integral part of financial planning, and it often requires the advice of professionals like attorneys or certified accountants.

What is it and why should I care?

Tax planning is essential because it can result in substantial tax savings. The opportunity for tax planning generally ends on December 31 for those who compute federal income tax on a calendar-year basis. Effective tax planning involves timing income and deductible expenses to be taxed at lower rates or claimed in years when you are in a higher tax bracket.

How Can Taxes Affect Me?

Taxes can affect you primarily through the timing of your income and deductions. The goal is to time these so that income is taxed at a lower rate and deductions are claimed when you’re in a higher tax bracket. Effective tax planning can result in substantial tax savings.

What is the 3.8% surtax and who has to pay it?

The 3.8% surtax applies to net investment income for individuals with modified AGI exceeding $250,000 for joint filers, $200,000 for single filers, and $125,000 for married taxpayers filing separately.

What is the Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) is a separate method of determining tax liability designed to ensure that high-income taxpayers do not completely avoid federal income tax through deductions, exemptions, and credits. All individuals, estates, and trusts subject to regular income tax are also subject to the AMT.

Tax Brackets

Tax brackets play a crucial role in determining how much you owe in taxes each year. Understanding how they work can offer valuable insights for effective tax planning, allowing you to make informed decisions about your income and deductions.

How do tax brackets work?

Tax brackets are ranges of income that are taxed at different rates. There are seven tax brackets for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The income level at which these rates apply depends on your filing status (Page 2).

How can timing affect my taxes?

Timing is crucial when getting tax services San Bernardino. The basic strategy is to time income so that it will be taxed at a lower rate and to time deductible expenses so they may be claimed in years when you are in a higher tax bracket.

Married or Single: Does it Matter?

Your marital status affects the income levels at which tax brackets apply. Generally, it is more beneficial for married individuals to file jointly, as tax rates are sometimes higher when income is separately taxed. However, in some instances, filing separately may reduce overall tax liability.

What happens if my income changes significantly?

If your income changes significantly, various tax planning opportunities may arise. For example, if you anticipate being in a higher tax bracket next year due to events like marriage, divorce, or changes in employment, you may want to accelerate income into the current year. This can help you spread your income more evenly across multiple years, potentially reducing your overall tax burden.

What Counts as Income?

Income can come from a variety of sources and is generally subject to taxation. According to the PDF, types of income include but are not limited to:

• Income or profits from a business
• Gains from dealings in property like real estate and securities
• Interest income from bank accounts, CDs, and loans
• Rents collected from real or personal property
• Dividends and royalties
• Annuities, pensions, distributions from retirement plans, and Social Security benefits
• Income from the discharge of a debt
• Income from an interest in an estate or trust
• Prizes and awards

It’s important to note that some types of income are specifically excluded from gross income, such as gain from the sale of a principal residence or interest on certain state and municipal bonds.

How Can I Plan My Taxes?

Planning your taxes involves several key strategies that focus on the timing and method of reporting income, deductions, and credits. The primary goal is to minimize your income taxes as much as legally possible. Here are some detailed points on how you can plan your taxes:

Timing is Everything

The basic strategy for tax planning is to time your income so that it will be taxed at a lower rate and to time deductible expenses so that they can be claimed in years when you are in a higher tax bracket.

If you expect to be in a lower tax bracket next year, you should defer receiving income to the next year and accelerate deductions into the current year. Conversely, if you expect to be in a higher tax bracket next year, you should accelerate income into the current year and defer deductions until the next year.

Cash vs. Accrual Method

Most individuals use the cash method of accounting, where income is reported when actually or constructively received, and expenses are claimed when paid.

This method offers flexibility in timing income and expenses. For example, if you’re self-employed, you can accelerate income by ensuring all billing is done so you can collect the income before the end of the year.

Maximizing Deductions

It’s crucial to make sure you meet the requirements to claim deductions for certain expenses paid during the year. Planning your expenses can help determine whether some of them can be shifted from one year to another to maximize their effect in calculating tax liability.

Investment Income

If you have investment income, you’ll also need to plan for the possibility of being subject to the 3.8% net investment income tax. This could include spreading out investment income over several years.

Retirement Contributions

Making maximum allowable contributions to retirement plans can also help in deferring income and reducing current tax liability.

By understanding these strategies and applying them judiciously, you can optimize your tax situation and potentially save a significant amount of money.

Conclusion

Effective tax planning is not just a one-time activity but a continuous process that can yield significant financial benefits. The strategy revolves around the timing of income and deductions, the choice of accounting method, and maximizing allowable deductions.

Being proactive in your tax planning can open the door to various opportunities, such as retirement contributions and investment strategies, that can further reduce your tax liability. It’s a complex but rewarding endeavor, often requiring the advice of professionals like attorneys or CPA accounting firm for optimal results

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In today’s time, the workforce is changing continuously. Today, many individuals want the flexibility to live life as they want and for this, they are going for freelance and gig work. But along with this freedom, they also have to take the responsibility of managing their personal finances and tax planning. However, freelancers and gig workers face specific tax challenges that will be different from traditional employees. They may find it difficult to understand taxes and should connect with tax preparation Fontana professionals who can guide them in this. Keep on reading to find out more about how tax professionals can help them with their tax savings.

Self-employment tax

The first thing you need to understand as a freelancer or gig worker is the self-employment tax. Traditional employees have to face different kinds of tax because it is deducted from their paychecks. Self-employed individuals have to be responsible for paying taxes for both the portions of employer and employee. With a tax professional, you can easily understand your obligations and can set aside the right amount for these taxes.

Right business structure

The first thing a tax professional providing tax services San Bernardino will assist you with is finding a suitable business structure. There are different types of business structures, such as sole proprietorship, LLC, etc. All these structures have different tax obligations and with a tax professional, you can understand the best option for you according to your circumstances. This way, you will be able to choose an option that suits your financial goals and tax-saving potential.

Income and expenses

If you want to maintain a proper record of your income and expenses, it is important to keep things organized. This will help you substantiate deductions and report earnings properly. Tax professionals can help you with choosing the right record-keeping options and can even assist you with digital tools that will make the process much more convenient and seamless for you. This way, you can rest assured that no deductible expense is missed during tax preparation.

As a freelancer or gig worker, you may face unique tax challenges. But with a tax professional, you can get the right assistance.

About G&S Accountancy Inc.:

G&S Accountancy Inc. is one of the leading firms that can help you with tax preparation by a professional tax preparer Rancho Cucamonga, and more. They have a team of professionals who can easily assist you according to your specific needs and requirements. They can help you understand your tax obligations efficiently.

To get tax preparation services, visit https://www.gns-cpas.com/

Original Source: https://bityl.co/KMuk

Small businesses face unique challenges when it comes to accounting and financial management. From bookkeeping to tax planning to financial reporting, many tasks can be overwhelming for a small business owner. That’s where G&S Accountancy Inc. comes in, offering a wide range of accounting services tailored specifically to small businesses. From small business bookkeeping services to tax planning to financial reporting, they have all the bases covered so that small business owners can focus on the creative and innovative aspects of running their businesses.

Personalized Attention and Guidance for Each Client

At G&S Accountancy Inc., they know that one size does not fit all. They provide personalized attention and guidance to each of their clients, getting to know their unique business goals and needs. With their guidance, small business owners can confidently navigate the accounting world and make informed decisions about the future of their businesses. Plus, they provide the peace of mind that comes with knowing their finances are in good hands.

Expertise in Small Business Accounting

Not all accountants are created equal. G&S Accountancy Inc. specializes in small business accounting and local CPA for small business, which means they have the expertise to help their clients navigate the unique challenges and opportunities of owning a small business. They know that creativity and innovation are at the heart of small business success, and they provide the financial foundation to support those efforts.

Client Testimonials and Success Stories

The proof is in the pudding, as they say. G&S Accountancy Inc. has helped countless small businesses to grow and thrive. Their client testimonials and success stories are a testament to their commitment to their client’s success. For example, they have helped many startup companies go from small online stores to recognized brands. With G&S Accountancy Inc. in their corner, small businesses can achieve their wildest dreams.

The Importance of Accounting for Small Business Success

Some small business owners may think they can handle their accounting, but that’s like trying to build a house without a solid foundation. Accounting is the foundation of any successful business. It’s the key to making informed decisions and staying financially stable. By partnering with G&S Accountancy Inc., small business owners can focus on the fun and creative aspects of running their business while leaving the CPA services for small business to the professionals.

Visit https://www.gns-cpas.com/ to know more about CPA services.

Original Source: https://bityl.co/IpDK

Tax is a financial obligation imposed by the government on individuals and businesses to fund government services and programs. It is a compulsory payment that must be paid by all citizens and businesses that meet the criteria established by the government. Taxes can be levied on income, property, goods, and services. It is important to understand the different types of taxes, how they are calculated, and when and how to file for tax benefits.

When and How to Start Tax Services?

If you are looking to start a business providing tax services San Bernardino, you will need to register with the IRS and obtain a valid EIN (Employer Identification Number). You will also need to research the different types of taxes, how they are calculated, and how to complete the required forms. You should also familiarize yourself with current tax laws and regulations to provide accurate advice to your clients. Additionally, it is important to understand how the tax system works so that you can provide your clients with clear guidance regarding their filing requirements. Finally, you should consider taking a course in taxation or obtaining professional certification from an accredited organization.

Reasons You Should Start Your Tax Preparation Now

• Preparing your taxes early gives you more time to review them carefully and make sure they are accurate. This can help you avoid making costly mistakes that could result in penalties or other problems down the road.
• If you wait until the last minute, you may find yourself overwhelmed by all of the paperwork that needs to be completed in a short period. Starting tax preparation Fontana can help you spread out the work over several weeks or months, so it is more manageable for you.
• Early preparation also gives you more time to look for potential deductions or credits that could save you money on your taxes.
• Early preparation can also help you take advantage of any tax changes that took place during the year so you can get the most out of your return.
• Finally, starting your tax preparation early gives you more time to review your filing status so that you don’t miss out on any potential benefits due to incorrect filing status or missed deadlines.

About G & S Accountancy Inc.:

At G&S Accountancy Inc., they also specialize in providing trucking accounting services in the area. Their experienced team of accountants can help you with all aspects of bookkeeping including tax preparation, consulting services, and more.

Contact them today for more information, https://www.gns-cpas.com/

Original Source: https://bityl.co/Iwhy

Are you a small business owner? If yes, you must have the right team to support you because there are various financial aspects that you need to take care of when you have a small business. Hence, you must work with a local CPA for small business. They can provide you with a variety of services and can make your life much easier. There are various ways in which they can help you. We have listed them below.

Financial planning

One of the most important things that the local CPA will help you with is creating a financial plan for your business by considering various factors such as forecasting, budgeting, and much more. They can do so because they can efficiently analyze your current situation and can make a plan that will align with your future goals. Hence, your business will surely flourish in just a small amount of time.

Financial reporting

Without the help of a professional, you cannot prepare financial reports. So, you must work with the local CPA who can take care of reports like balance sheets, cash flow statements, etc. With the help of these reports, you can also stay informed about the financial performance of your business and can make the right decisions for its growth.

Compliance

There are various state and local regulations that your business must comply with. There are various legal requirements too that you need to consider along with environmental regulations and much more. With the help of CPA services for small business, you can always make sure you comply with these regulations and are never behind them.

Business valuation

You may also require business valuation services when you are planning on going for mergers and acquisitions or financing. You may also need these services for succession planning. So, you can do it efficiently with the help of a local CPAbecause they can determine its value by relying on the right factors.

Hence, a local CPA can surely provide you with the best services and can also help you with strategic planning.As a result, your business will grow with the help of such services.

About G&S Accountancy Inc.:

G&S Accountancy Inc. is one of the leading companies that you can connect with if you want to get small business bookkeeping services. They can provide you with the most premium quality servicesand can make sure that your business achieves its financial goals with the help of these services.

To get CPA services, visit https://www.gns-cpas.com/

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