Save Taxes by Shifting or Deferring Income

• Shifting Income to Your Child - Children under the age of 19 and full-time students under the age of 24 are subject to the so-called kiddie tax. This was enacted by Congress to restrict taxpayers from shifting large amounts of income to their children by taxing the child at the parent’s marginal tax rate. However, for children without earnings from working, there is no kiddie tax on the first $1,050 for 2016 and 2017 of investment income, and the next $1,050 is taxed at 10%. Once the child is beyond the applicable age, all of their income is taxed at their own marginal rate.
   
• When the income of a child subject to this tax calculation reaches the point where it would be taxed at the parent’s rate, making investments through tax-deferred investment vehicles becomes a prudent option.  Placing or moving a child's funds into tax deferred or tax free investments such as U.S. Savings Bonds, tax-deferred annuities, municipal bonds, growth stocks, etc., that produce little or no current taxable income, can help avoid the Kiddie Tax, at least in the years until the investments need to be sold or redeemed to pay for education expenses.
  
  
• Investing in U.S. Savings Bonds - Interest income from certain types of U.S. Savings Bonds may be deferred until the bonds mature or are cashed in, whichever occurs first. Thus, one can defer income for the life of the bonds.
  
  
• Investing in Deferred Annuities - Because the interest earned on a deferred annuity is tax-deferred, your earnings are not taxed until withdrawn. This also allows the investment to compound faster.
   
• Employing Your Child - Payments that you make to your child under the age of 18, who works for you in your trade or business that is a sole proprietorship or partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes. As long as the pay is reasonable for the necessary services to the business provided by the child, you can deduct that pay as a business expense. Assuming the child has no other income, he or she will not have any tax on the first $6,350 of wages from you in 2017 (up from $6,300 in 2016). Your child may also make deductible contributions to an IRA of the lesser of earned income or $5,500. These contributions can offset income, so your child could receive $11,850 in gross income by combining the IRA deduction with the standard deduction and pay no tax. 

IRA Contributions - For 2016 and 2017 an individual may contribute the lesser of his or her compensation or $5,500 to their IRA accounts. The spouse can do the same even if he or she does not work, provided the joint compensation is at least $11,000 for the year. For individuals age 50 and over, the annual limit is increased by $1,000. Contributions to a Traditional IRA cannot be made once the taxpayer reaches age 70-1/2. For purposes of determining IRA deduction limits, individuals who receive taxable alimony and separate maintenance payments may treat the alimony as compensation even if it is the only income they have. This allows alimony recipients to save for their retirement by making either Traditional or Roth IRA contributions. Traditional IRA contributions are deductible if the taxpayer and spouse (if married) do not actively participate in another qualified retirement plan, or if participating in another plan, their AGI is below income phase-out levels. For married taxpayers where one spouse is an active participant in a qualified plan and the other is not, the IRA deduction is phased out when AGI is between $186,000 and $196,000 for the one who is not an active participant in 2017 (up from $184,000 and $194,000 in 2016. 

• Roth Rollover Strategies - There are some interesting strategies a taxpayer can employ to convert nondeductible traditional IRA contributions to a Roth IRA, thereby funding the more favorable Roth IRA. Taxpayers who have employer plans and are restricted from making deductible traditional IRA contributions because of income level can make nondeductible traditional IRA contributions and then convert those nondeductible traditional IRAs to Roth IRAs with virtually no tax since they were nondeductible. Only the earnings from the time of the original contributions up to the time of conversion would be taxable. Taxpayers who are prohibited from making Roth IRA contributions because their income exceeds the limit may also benefit from this strategy. Using the same strategy, even a taxpayer who can make a deductible contribution to a traditional IRA can elect to make it nondeductible, providing the same result as above.
  
  
• Self-Employed Retirement Plans - The maximum deduction for a self-employed individual’s contribution on their own behalf to a profit-sharing or SEP plan for 2017 is the lesser of 20% of net self-employment earnings (after the deduction for one-half of self-employment taxes) or $54,000 (up from $53,000 in 2016). In addition, a self-employed individual who is age 50 or older can make an additional catch-up contribution of $6,000.
  
  Self-employed individuals are also allowed a 401(k)-style elective deferral of the lesser of the annual maximum ($18,000 in 2017, same as 2016) or the net profit from the self-employed business less the profit-sharing or SEP contribution.

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