Breaking Bad News

[Snow White]

I have a MFJ couple who both own Schedule C businesses with two dependent children, one eligible for CTC. I have done their taxes for the past few years. Because of the net income on the business, along with their itemized deductions, they have had a zero tax liability and have recieved refundable additional CTC plus EIC. However, this year, their income dramatically increased by $20,000 thereby blowing out any EIC and having more income on which to pay SE tax. Now, instead of getting a $2,000 refund like the past, I have to tell them they owe $5,000. No penalties as they had zero tax liability in the past but it will be hard to swallow for them. Any advice on how to break it to them? I tend to be a little thin-skinned.

[Matt Sova]

Tell them

Congratulations!!!! The fruits of your labor are finally paying off.

[Snow White]

I never thought of that

But you're right - thanks for the insight!

[Brian EA]

I have a MFJ couple who both own Schedule C businesses with two dependent children, one eligible for CTC. I have done their taxes for the past few years. Because of the net income on the business, along with their itemized deductions, they have had a zero tax liability and have recieved refundable additional CTC plus EIC. However, this year, their income dramatically increased by $20,000 thereby blowing out any EIC and having more income on which to pay SE tax. Now, instead of getting a $2,000 refund like the past, I have to tell them they owe $5,000. No penalties as they had zero tax liability in the past but it will be hard to swallow for them. Any advice on how to break it to them? I tend to be a little thin-skinned.

If you have the info from last year, you can show them the comparison. Ask them if they would prefer to get back $2000 in EIC or $20000 in income I am sure it would be easy to break this news to them

[Snow White]

Another Good Point

I was planning to show the comparison but you're putting a great positive twist on it. This is good - I appreciate it.

[BOB W]

Tell them also...............

........ that they now are getting SS credit to cover Disability and Retirement benefits.

(This is probably the bulk of the taxes owed anyway.)

[Snow White]

SE Tax

You are correct!

[Bill Tubbs]

Go thru the comparison...

I was planning to show the comparison but you're putting a great positive twist on it. This is good - I appreciate it.

I never know how much the client is expecting to get/pay for the year. So, I always go thru the comparison to show them how the numbers changed. And, by the time we get down to the bottom line, they aren't surprised how the bottom line comes out.

>>However, this year, their income dramatically increased by $20,000 thereby blowing out any EIC and having more income on which to pay SE tax<<

I imagine you've already looked over the Sec 179 possibilities. Also, depending on the kids ages and the business, perhaps they can hire the kids to do some work next year... the kids' wages may not be subject to Soc Security, may be below their standard deduction (so they don't owe tax at all), and yet reduce the parents' Sch C income subject to Fed/State Income Tax & Self-Employement tax -- even if kids ended up with some taxable income, the benefits to the parents may very well exceed the cost to the kids. Also, if business is run by one spouse and the other spouse is an employee, I would suggest looking into a health reimbursement plan. An opportunity for some tax planning here for the future.

Bill

[Snow White]

Checked

I imagine you've already looked over the Sec 179 possibilities. Also, depending on the kids ages and the business, perhaps they can hire the kids to do some work next year... the kids' wages may not be subject to Soc Security, may be below their standard deduction (so they don't owe tax at all), and yet reduce the parents' Sch C income subject to Fed/State Income Tax & Self-Employement tax -- even if kids ended up with some taxable income, the benefits to the parents may very well exceed the cost to the kids. Also, if business is run by one spouse and the other spouse is an employee, I would suggest looking into a health reimbursement plan. An opportunity for some tax planning here for the future.

Bill[/QUOTE]

Yep. Check section 179 and have a new asset for that. I see what you're saying about hiring the children. Older child turned 18 and is splitting the scene so they won't even have that exemption for 2006. Younger child is 8. Father has house siding business and hires men. Mother cleans houses. Two separate schedule C businesses. No where to go with that end of it. HSA's would be nice but they qualify for subsidized health ins from state.

[oceanlovin'ea]

Be creative

well, not too creative. But I'm sure that there are some things that the 8 year old could do to help. Mom probably cleans houses while child is in school. But what happens during the summer? Does child go with one parent or the other or stay with someone else.

Might have to be careful taking a child to someone elses house. Wouldn't want anything to get broken.

But does the wife take care of husbands books? Make deposits for him? If she did those kind of things, she could also be an employee of her husband's business and then set up a medical reimbursement plan.

Talk to them about what their work involves and see if the child can help in some way.

Linda F