To Have And To Hold
Much has been made in recent weeks about the "marriage penalty" tax that stings married couples who file their taxes together with a stiffer tax bill than unmarried couples who file separately.
While Congress continues to crank up efforts to eliminate, or at least alleviate, the marriage penalty (both President Clinton and Congressional Republicans favor its elimination), there are some overlooked tax benefits for spouses that you shouldn't ignore. Here are a few you may have overlooked:
- Personal exemptions. The write-off you get for yourself, your spouse and your dependents increased $50 this year to $2,750 per person.
- Gift-splitting. The IRS lets you give $10,000 per year per person to as many people as you like without worrying about gift taxes. If you gave away more than $10,000 to someone last year and you're married, you can "gift split," or combine your maximum gift with that of your spouse. So combined with a spouse, you're allowed to give $20,000 per year per person before the government wants a cut. If you're giving to another couple (married children, for example), that's $40,000 annually. Normally, if you give away less than $10,000 to someone in a given year, you don't have to file the U.S. Gift Tax Return. In the case of gift-splitting, though, you do have to file IRS Form 709 or 709-A (the equivalent of a Gift Tax-EZ).
- Spousal IRA contributions. Nonworking spouses. In the past, if a working spouse had a retirement plan at work and earned too much, both spouses were denied the IRA deduction. No more. These days, a contribution to a spousal account can be fully deducted as long as the family's income is less than $150,000.
- Self-employed health insurance. The deduction for health insurance premiums paid by entrepreneurs increased from 45 percent to 60 percent last year. The good news is the deduction will rise to 70 percent for 2002 and to 100 percent for 2003.
An added bonus to this tax relief: The IRS is making it even easier to deduct medical expenses if your spouse is an employee of your business. Some background: In March 1999, the IRS began permitting a self-employed taxpayer, such as a sole proprietor, partner or LLC member, to deduct 100 percent of the cost of accident and health coverage provided to a spouse who is employed in the taxpayer's trade or business. The cost is fully deductible as a business expense. You'll want to check with a tax adviser on the details.
The health-care coverage of the employee's spouse may include insurance for the employer/ spouse and any dependents of the married couple. As a fringe benefit, the total cost of all the coverage is excluded from the employee/spouse's income and is also deductible by the employer.
According to a review in the August 1, 1999, edition of the National Public Accountant, such spousal employment cases hinge on the factual analysis of the term "bona fide" employee. In the most general terms, a bona fide employee may work part-time, but he or she must perform significant services that have economic substance-simply referring to a spouse as an employee is insufficient. Also, if the spouse is classified as an owner, he or she can't be an employee. The employer-employee relationship should be documented, i.e. hours worked, duties assigned, compensation paid, etc. Finally, the employee/spouse must be treated exactly the same as other employees in terms of medical plan eligibility requirements, or any deduction would be disallowed as discriminatory in favor of the spouse.
- For more information on tax breaks involving entrepreneurs and spouses, call a tax specialist for details or grab a copy of the free handbook The IRS Tax Guide for Small Business by calling (800) TAX- FORM, or download it at www.irs.ustreas.gov.
- You can also find help through the SBA, or check out Entrepreneur magazine's Start-Up Guides. There are more than 50 industry-specific books on small business, each containing a section on taxes for that business.
Brian O'Connell is a Framingham, Massachusetts-based freelance business writer. His most recent book, B2B.com (Bob Adams Media), is available this September. His earlier books, Generation E: How Young Entrepreneurs are Changing the Corporate Landscape (Entrepreneur Press) and The 401(k) Millionaire (Random House/Villard), are available in bookstores. A frequent contributor to many national business magazines, he can be reached at Bwrite111@aol.com.