Shifting Income in a Family Business

If you’re a sole proprietor, you can shift income by hiring your minor children to help in your business. In addition to providing valuable work experience for your child, this arrangement offers significant tax savings to the business. As long as the work your children do is legitimate and you follow all the rules and they receive reasonable wages, you can deduct their wages as a business expense and shift the money to your children in lower tax brackets.

As an added bonus, if your son or daughter is under age 18, you don’t have to pay Social Security or Medicare taxes on the wages you pay. Because of the standard deduction, in 2010, the first $5,700 earned by each child is not taxed. Also, since it’s earned income, it is not subject to the Kiddie Tax. Just be sure to file W-2 forms and other necessary tax forms for the child. A child claimed as a dependent cannot claim the standard deduction. They can claim a $950 deduction against earned income.

New Energy Incentives

In 2010, homeowners can again claim tax credits for making certain energy-saving improvements to their home. These credits include the (1) Qualified Energy Efficiency Improvements and Residential Energy Property Expenditures Credit and (2) Residential Energy Efficiency Property Credit.

Under the Qualified Energy Efficiency Improvements and Residential Energy Property Expenditures Credit, homeowners can receive a credit of 30% of the costs of qualified energy-efficient property or improvements. Improvements include insulated walls or ceilings; energy-efficient exterior doors and windows, including skylights; specially treated metal or asphalt roofs; and a high-efficiency furnace, water heater or central air conditioning system. The improvements must have been made to the principal residence in the United States and the maximum credit is $1,500. 

The 30% Residential Energy Efficiency Property Credit applies to costs for qualified residential solar panels, a geothermal heat pump, solar water-heating equipment, qualified solar electric property costs and small wind-energy property. This credit has no dollar limit or principal-residence requirement. A second 30% credit for qualified fuel-cell plants has principal-residence and kilowatt-capacity requirements, and cannot be greater than $500 for each 0.5 kilowatt of capacity.  

Retirement Savings Contributions (Saver’s) Credit

The tax law recognizes that paying bills while saving for retirement can be one of the greatest challenges for Americans today, especially for those earning lower incomes. The Saver’s Credit offers some relief.

Qualified taxpayers who make contributions to a retirement plan, including traditional IRAs or Roth IRAs, by April 15, 2011 are eligible for this nonrefundable tax credit. The 10%, 20% or 50% credit is based on adjusted gross income and applies to the first $2,000 of contributions, bringing the top credit to $1,000.

To claim the credit, adjusted gross income must be less than $55,500 if married filing jointly, $41,625 if head of household or $27,750 if single, married filing separately or a qualifying widow(er).

Adoption Credit

There is good news for people who are planning to adopt a child. Two tax benefits offset the escalating expenses of adopting an eligible child.

In 2010, the adoption credit, which is fully refundable, rose to a maximum of $13,170 per child. Parents who work for companies with an Adoption Assistance Program can receive up to a $13,170 reimbursement from their employer for qualified adoption expenses without paying taxes on that benefit.

This benefit phases out for modified AGIs between $182,520 and $222,520. The credit or exclusion can be fully claimed if modified AGI is less than $182,520 and it cannot be claimed if modified AGI is equal to $222,520.

When you adopt a child with special needs, you are allowed to claim these benefits regardless of actual expenses paid or incurred in the year the adoption becomes final. You are assumed to have incurred the maximum amount of qualifying expenses and may claim the full credit.

When adopting a child from within the United States, the family is permitted to take the credit in the year following the year where the actual expense was incurred. These expenses are deductible even if the adoption ultimately is not completed. This is different from how adoption expenses are treated if the child is from outside the United States.  

Where a foreign adoption is involved, the family may not deduct any expenses until the adoption is final, which considering the time and uncertainty of a foreign adoption, places an added burden on the family financing the cost of the adoption. Clearly, in this situation, the longer the adoption process, the more expenses are incurred, none of which are deductible until the adoption is finalized.