No more child tax credit exemption and a zero percent tax bracket? How do these work together to make the perfect business and individual tax strategy?
Business owners face and make a lot of decisions that define their good business sense and ethics. These are things which instill a legacy of responsibility, respect and love that comprise the foundation of a family-owned small business. Jennifer and Mike’s story is a composite of decisions and actions made by my clients who come to me for proactive tax and business and life goals financial guidance. Jennifer begins:
My husband and I own a restaurant, mom and pop place, and one of the few days we’re closed is when we celebrate our son, Josh’s birthday by inviting family and close friends in for dinner. January is a great month for the hearty home style cooking we serve.
Healthy son, healthy business, healthy legacy.
Mike and Jennifer have been clients for many years, and I’ve attended more than several birthday dinners, but 2018 was different, Josh turned 16. As their CPA tax specialist and business and family adviser, I knew there would be changes and some great opportunities. But this story actually begins in May of 2017. Taxes have already been filed and I’m meeting with Mike and Jen for their annual tax planning session. Because of impending year-end tax law changes we adjusted strategy a bit to add more flexibility to their plans. By fourth quarter 2017 we readjusted to better prepare for suspected end-of-year tax surprises. Mike and Jen were not disappointed when we submitted their 2017 returns in early 2018.
At their early May 2018 tax strategy meeting, Mike reminiscences a little:
It’s about family. When Josh was little and under foot in the restaurant, my main goal was to not step on him! He always wanted to do things he was either too young to do or couldn’t reach. And getting him to school and T-ball made life even better. We have a good business, a great kid, and each other. Josh is part of the business. It’ll be his some day.
No Child Tax Credit exemption and new tax plans.
Mike and Jen have financial life goals as well as business goals that the Tax Cuts and Jobs Act of 2017 affected. We talked about this months ago, and now we’re getting into details.
- We had already set up a 529 savings plan for Josh and his grandparents have also contributed. It wasn’t as large as they would have liked, but a scholarship was also on the horizon. The 529 would continue to be funded.
- The new tax laws wiped out their personal exemptions, and adjustments had already been made in the early weeks of 2018.
- A major concern was that they could no longer deduct Josh on their individual taxes because all personal exemptions are GONE.
- And because Josh would turn 17 in January 2019, they could no longer claim the $2000 child tax credit exemption for the tax year 2019.
The Child Tax Credit exemption under the 2018 tax reform is worth up to $2,000 per qualifying child. The age cut-off remains at 17 (the child must still be 16 at the end of the year for taxpayers to claim the credit). The refundable portion of the credit is limited to $1,400.
It’s not by mistake that Mike and Jen have a business and family tax strategy and financial life goals. We’ve been working together for quite a few years, and they always know they are in control because they have a CPA tax professional and business and life goals adviser. So, what have Mike, Jen, and their son Josh achieved?
- Their business has a plan to continue growing. It also has a succession plan which includes an emotional- and business-driven plan for handover to their son.
- As a toddler, Josh began learning about their family business. He knows the succession plan allows him to opt out as a future owner, without negative financial consequences to the family or business.
- Jen and Mike have learned, and have allowed their son to “work” and learn about the burdens and benefits of being a responsible citizen, business owner and family member. They always joked that the food Josh and his friends ate was all they could afford to pay him for “working.”
Attaining a zero percent tax bracket and coping without the Child Tax Credit exemption.
Here are some of the results of Mike and Jen’s May 2018 tax strategy meeting:
- In 2019 Josh will go from ‘working for food’ to earning money in a zero percent tax bracket.
- Beginning while in a zero percent tax bracket, Josh will start building a tax free income for his future.
- Mike and Jen are reviewing their business structure, which may include purchasing a new business property and providing enhanced employee benefits. Although they will no longer be able to claim the child tax credit exemption, the benefits will outweigh that exemption.
What’s the bottom line?
Whether you’re a business owner or not, every person should have a proactive, planned tax strategy. Most any CPA, accountant or bookkeeping system can give you a result or the bottom line. A report of what has happened. The new tax laws have set in motion major changes. If you don’t have a goal and a strategy to reach that goal, the tax laws and somebody else’s plans will probably be the force directing your future.
You can have the same opportunities as my clients have to control your own financial future. I can become your CPA tax specialist and financial business and life goals adviser and you can have the control you need and want.
Our goal is to become part of your overall life and business goal planning team so that you’ll be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life. We’re here for YOU.