My sister and I inherited a decent estate from our parents, split equally. It’s been emotional, but we’re grateful. The account is a mix of stocks and mutual funds, generating around $40-50k annually in gains and dividends. We both own similar assets.
Here’s where I’m puzzled. Neither of us works full-time. I retired early, and my sister runs a small appointment-only business that barely breaks even. Her husband is retired too. Despite similar financial situations, my taxes in 2023 were over $8k from the account, while their tax bill was practically zero.
She mentioned their accountant uses the business losses to offset their taxes, but the business is small. How could that cover such a large tax bill? Shouldn’t they owe the same as me, with 12% federal and 4% state tax rates? I’m just confused about how they’re doing this.
Do you have any other income? If their taxable income is low and they file jointly, their capital gains might fall into the 0% bracket. It could just be about how their income is structured, not necessarily the business expenses.
It’s a taxable brokerage account. I’m just worried they might get into trouble with the IRS. I owned a small business before and got audited because of an honest mistake, even though I kept everything above board.
There’s no sibling rivalry here—we’re close and share most things. If using a small business to offset taxes works for them, maybe I should think about starting one again.
First, unless you’ve seen their tax return, you can’t be sure about what’s going on. Second, their business could have legitimate expenses reducing their taxable income. For instance, costs of goods sold or other expenses might be offsetting their income.
If you’re suggesting they might be cheating, that’s a different story. Some small businesses push the limits and get away with it for a while, but it often catches up to them. The question is, would you report them if you knew for sure? The IRS offers rewards for turning in tax fraud.
Lastly, why are you two discussing taxes so much? These conversations rarely end well.
They might be spending enough through the business to cancel out their taxes. But if they’re doing that, they’re likely spending more than you’re paying in taxes. A write-off isn’t free; it still costs money overall.
@Zephyr
Exactly! I’m just trying to understand, but I’m not about to ask for their tax returns. Their accountant has been a bit questionable in the past, but I know they aren’t trying to cheat. They’re just not super financially savvy. I’ve given them some tips before, but now I just wait until they ask.
If the dividends and gains are too much of a tax issue, you could sell the investments and reinvest in options like tax-free bonds. You’d just pay capital gains tax on the increase since the inheritance.