Tax Planning Opportunities
There are several tax planning opportunities within the topics covered in this chapter.
Insure proper amounts are withheld. There is no more unpleasant surprise than having to pay more income tax when filing a return. Properly plan the amounts that are withheld to avoid the surprise. Or, if saving money is an issue, have extra withheld to create a savings surprise fund at tax time. These funds do not earn interest but are still useful for bigger expenditures.
Specify exemptions in a divorce decree. When couples divorce and have dependents, the divorce decree should specifically state who is entitled to claim any dependents and under what circumstances. For example, a spouse who is making alimony and or child support payments might be designated to take the exemptions only if payments at the end of the year are not in arrears.
Use multiple support agreementsmultiple support agreementAgreement allowing one person to claim an exemption when more than one taxpayer provides support of an individual but less than half.. When more than one person contributes to the support of a family member, a multiple support agreement can be used.
Example
Brie, Brianna, and Carrie contribute 25%, 40%, and 35% of the support during the year for their father, Bill. If they agree and sign a multiple support agreement (Form 2120) any of the three may claim Bill as a dependent since they all contributed at least 10% of the support.
Avoiding estimated payments and penalties. Taxpayers who are subject to the estimated tax payment rules can avoid paying penalties and also may be able to avoid making estimated payments. By paying at least 100% of last year’s tax liability, a taxpayer will not be subject to a penalty if the taxpayer under-deposits estimated payments.
A taxpayer can also avoid making estimated payments even if he/she has significant income not subject to normal withholding.
Example
Erika is employed by the local hospital as a salaried nurse. She also works as a self-employed home health nurse and expects to earn an additional $6,000 during the year. She estimates the additional income and employment taxes will be $1,620. Erika goes to her employer (hospital) and prepares a new W-4 requesting that an additional $135 ($1,620/12) be withheld from each monthly paycheck.
