John M. Hoffman CPA

Favorite Tax Planning Ideas

Hire that child - and actually have him work

Hiring your child to work in your business can be a great idea. Not only does your child get experience in a work environment but you might end up spending "quality time" with your child.

Tax benefits:

Income paid by your business to your child is tax deductible to your business. Yes, it is taxable income to your child but we should presume that your child is at a lower tax bracket than you. If your business is unincorporated and your child is under age 18, that income is not subject to social security / Medicare tax. If your business is incorporated or your child is over age 18, your child's earnings will be subject to social security / Medicare tax.

Other Benefits:

If your child has earned income, they can contribute to an IRA. For most children the IRA of choice is a ROTH IRA. Imagine if you hire your 17 year old to help with office work after school and in the summer time. Let's say that you agree to pay that child $10 per hour and they work 250 hours (5 hours per weekend twice per month plus a half day twice per week during the summer). That adds up to $2,500. Your child could contribute $2,500 to a ROTH IRA and have a lifetime of tax free accumulation for retirement. Even if your child wants to spend the $2,500 on designer jeans and ITunes, you can still make the $2,500 IRA contribution for them.

Example:

Child (age 17) has $250 of interest income and earns $2,500 working in her father's unincorporated accounting office doing filing, mailings, and data entry. Total income for the child is $2,750. The child gets a standard deduction of her earned income plus $300 - in this case a total of $2,800. The standard deduction exceeds the income and their is no tax. The parent still gets the dependency exemption as well as the deduction for the $2,500 paid out of the business. The child is eligible for up to $2,500 in IRA contribution (ROTH would be the variety that would make sense).

Caveats:

The child really needs to do the work otherwise you are teaching bad work ethics to your child and the IRS would view the payment as a non deductible gift to your child and the IRA contribution would not be allowable.

Other Possibilities:

College aged children that might have enough income to actually pay a tax might be able to offset that tax with a tuition credit. Particularly where the parents have too much income to claim an education credit. If the business owner is under the social security cutoff, the social security tax paid by the child is not additional tax but simply tax paid by the child instead of the parent.

Don't Forget:

At real jobs employees are not texting their friends, logging into Facebook every ten minutes or watching YouTube videos while on the clock. These are important things for your child to know. Also, they should get to know that you log in time wise after getting your coffee and that lunch is not paid time.

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