What would Santa's tax return look like?By: National Association of Tax Professionals
December 3, 2024

With the holiday season right around the corner, have you ever wondered what the tax return would look like for Santa Claus? Here at NATP, we are tax geeks at heart and we’ve long been curious. What’s his income? What is Santa’s ordinary and necessary business expenses? Let’s break down the tax issues Santa may face and have a sneak peek at what his return might look like.

Santa’s marital status seems clear; he’s married to Mrs. Claus. Thus, his likely filing status would be married filing jointly. This would give him a higher standard deduction and favorable tax brackets.

Santa’s primary “business” is delivering toys worldwide, which makes him a potential sole proprietor — or possibly the head of a multinational conglomerate. If he is self-employed, he would file a Schedule C, unless he selects to have his business taxed as another type of entity. The pros and cons of his choice of how his business is taxed would require a deeper dive into how Santa runs his workshop than we are undertaking here.

Once you start thinking of what Santa’s return would look like, there is major a hurdle to clear: What is his income? He doesn’t charge for his services. Could one argue that the milk and cookies left for him are bartering income? On the flip side, are these gifts? These are all questions that need to be asked in what seems like a simple task of preparing a return for Santa.

That said, Santa might also generate income from intellectual property. The use of his likeness and image in various advertising campaigns could result in royalty income, which would be included on Schedule E of his return.

Santa’s business comes with substantial operational expenses, which are tax-deductible. Here are some notable deductions he’d likely claim:

  • Labor costs: The salaries and benefits for his team of elves would be deductible as ordinary and necessary business expenses. If Mrs. Clause helps out with in the workshop, she might also be on the payroll.
  • Sleigh maintenance: Keeping a magical sleigh in top condition isn’t cheap. Fuel (magic dust?), repairs and insurance would all be legitimate business expenses.
  • Reindeer care: His reindeer team’s veterinary bills, food and training costs would also qualify as deductions. If they’re considered “working animals,” this expense would be fully deductible.
  • Workshop utilities: The cost of maintaining a massive, year-round toy factory would include deductions for utilities, repairs and property taxes. One wonders if Santa could take advantage of energy-efficient credits for the North Pole.
  • Travel expenses: Santa’s global travel in one night is no small feat. While he doesn’t seem to spend money on airline tickets, there may be deductions for magical fuel or tolls for passing through restricted airspace.
  • Depreciation of assets: Santa’s sleigh and workshop are substantial capital assets. Depreciation rules would allow him to deduct their cost over several years. Since Santa has been in business for centuries the costs are fully depreciated. However, any repairs may still be on the books.

What would Santa’s Schedule C look like? Here is a quick peek at what his might of looked like for 2023 (of course, a lot of assumptions were made).
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Between managing deductible expenses for reindeer, claiming potential royalty income and navigating international tax law, Santa’s tax return would make even the most seasoned tax professional reach for the eggnog.

Happy holidays and may your tax season be less complex than Santa’s!

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You make the callBy: National Association of Tax Professionals
November 27, 2024

Question: Susan pays her neighbor Alli to babysit her 5-year-old son and perform light housework two days a week. Alli will turn 18 on Dec. and is a full-time high school student. Alli meets the definition of being a household employee and Susan pays Alli in cash for the hourly work performed. Susan consistently pays Alli $240 per month, meaning that by the end of the year she will have paid Alli $2,880 for her services. Susan is trying to determine if she has an obligation to pay Social Security, Medicare or federal unemployment taxes. As a household employer, is Susan required to pay FICA and FUTA taxes for the wages paid to Alli?

Answer: No. Although Alli is considered Susan’s household employee and household employers are subject to FICA taxes if they pay the employee at least $2,700 during the year ($2,600 for 2023), Susan is not subject to FICA taxes on Alli’s wages because Alli was under age 18 during the year. IRC Sec. 3121(b)(21) and Notice 95-18 state that if an individual is under age 18 at any time during the year, their wages are exempt from FICA taxes as long as the household services are not their principal occupation. Because Alli is a full-time high school student, her job working for Susan is not considered her principal occupation, therefore, her wages are not subject to FICA taxes.

Susan also does not have to pay FUTA taxes for the wages she pays to Alli because she paid her less than $1,000 for each quarter.

Federal tax research
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Retirement planning in 2025 ahead of the Roth catch-up changes By: National Association of Tax Professionals
November 26, 2024

Beginning in 2026, the SECURE 2.0 contains a provision that catch-up contributions by highly compensated employees must be Roth contributions, if the applicable employer plan allows for catch-up contributions. This requirement does not apply to a Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) or a Simplified Employee Pension (SEP). However, it will apply to 401(k) plans, 403(b) plans and governmental 457(b) plans.

Catch-up contributions made by participants whose Federal Insurance Contributions Act (FICA) wages from the employer sponsoring the plan exceed $145,000 (adjusted for inflation) for the preceding calendar year must be made to a designated Roth account.

This means that the designated Roth contributions will not be excluded from income (i.e. they will be made on an after-tax basis). Although the immediate tax benefit of deferring income is lost, the tradeoff is that the distributions from the Roth account (including investment earnings) are tax-free in retirement if certain conditions are met. Participants whose prior year FICA wages do not exceed the dollar limit will still be eligible to make excludable catch-up contributions or be permitted to make designated Roth contributions.

Example

In 2025, Mike, who is 53 years old, has FICA wages of $160,000. If he makes any catch-up contributions to his employer sponsored 401(k) plan in 2026, under the new rules, they must be made to a designated Roth account because his income exceeded the $145,000 threshold in 2025.

Mike’s co-worker Beth, who is also 53, has FICA wages of $90,000 in 2025. In 2026, she can continue to make her catch-up contribution on a pre-tax basis, or she could choose to make her catch-up contribution as a Roth contribution, even though she is not subject to the mandatory treatment.

To help Mike prepare for the change, a few strategies he could employ in 2025 include:

  1. Maximize his 2025 pre-tax 401(k) contributions.
    For 2025, the annual contribution limit for employees who participate in a 401(k) plan increased to $23,500. The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k) plans is $7,500. Therefore, Mike could contribution up to $31,000 to his 401(k) plan. Unless his income changes, 2025 is the last year he will be able to make pretax catch-up contributions.

  2. Evaluate the benefits of Roth contributions.
    Although Mike isn’t required to make Roth catch-up contributions until 2026, he should evaluate whether Roth contributions might benefit him in 2025. If he anticipates being in a higher tax bracket when he retires, making Roth contributions now, either as a designated Roth 401(k) or the catch-up provision, could be considered. Also starting in 2024, required minimum distributions (RMDs) are no longer required from designated Roth accounts, so that is something to consider if Mike is concerned with RMDs in retirement.

  3. Look for tax deferral opportunities elsewhere.
    If Mike enrolled in a high-deductible health plan (HDHP), and has a Health Savings Account (HSA), he should contribute the maximum amount to his HSA in 2025. HSAs have a triple tax benefit: contributions are tax-deductible, grow tax-free and withdrawals are tax-free for qualified medical expenses.

Additional IRS guidance is expected in cases where:

  • The eligible participant does not have FICA wages
  • Pre-tax contributions are automatically treated as Roth contributions for compliance purposes
  • Multi-employer plan wages from different employers can be combined
Retirement planning
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