Author Topic: I want to hire my 3-year-old so she has earnings for an IRA  (Read 2630 times)

GOFU

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I want to hire my 3-year-old so she has earnings for an IRA
« on: January 30, 2018, 04:04:24 PM »
I want to hire my three year old as my assistant gardener, assistant housekeeper and senior vice president of romper room operations.

I estimate the reasonable value of her services at about $500 a month. With these earnings she could max out a Roth IRA each year and have many years of tax-deferred growth.

So, who says I can't?

Frankies Girl

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #1 on: January 30, 2018, 04:22:39 PM »
If you like the idea of being audited, by all means take that risk. Chances are high that it might squeak by as they are understaffed and overloaded.

But if you want to be honest, then most likely paying a 3 year old $500 a month for "chores" in your household isn't going to fly. It is possible if you have a family business and they are able to pass the "sniff test" of being old enough to do actual work... which a 3 YO isn't capable of doing really IMO other than modeling/acting stuff.

http://bakertilly.com/insights/hiring-your-children-tax-savings-and-doing-it-the-right-way/

https://www.nolo.com/legal-encyclopedia/why-its-tax-smart-hire-your-children.html

First off
Quote
The IRS is well aware of the tax benefits of hiring a child, so itís on the lookout for taxpayers who claim the benefit without really having their children work in their businesses. If the IRS concludes that your children arenít really employees, youíll lose your tax deductions for their salary and benefits. And theyíll have to pay tax on their benefits.


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The IRS wonít believe that an extremely young child is a legitimate employee. How young is too young? The IRS has accepted that a seven-year-old child may be an employee but probably wonít believe that children younger than seven are performing any useful work for your business.

And

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First of all, your children must be bona fide employees. Their work must be ordinary and necessary for your business, and their pay must be for services actually performed. Their services donít have to be indispensable, only common, accepted, helpful, and appropriate for your business. Any real work for your business can qualify. You get no business deductions when you pay your child for personal services, such as babysitting or mowing your lawn at home. On the other hand, money you pay for yard work performed on business property could be deductible as a business expense.

And also

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Finally, you must comply with most of the same legal requirements when you hire a child as you do when you hire a stranger. This means you must fill out IRS Form W-4 and complete U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You must also record your employeeís Social Security number. If your child doesnít have a number, you must apply for one. In addition, you, the employer, must have an Employer Identification Number (EIN). If you donít have one, you may obtain it by filing IRS Form SS-4. You must also complete and file IRS Form W-2 showing how much you paid your child.

GOFU

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #2 on: January 30, 2018, 04:30:39 PM »
If you like the idea of being audited, by all means take that risk. Chances are high that it might squeak by as they are understaffed and overloaded.

But if you want to be honest, then most likely paying a 3 year old $500 a month for "chores" in your household isn't going to fly. It is possible if you have a family business and they are able to pass the "sniff test" of being old enough to do actual work... which a 3 YO isn't capable of doing really IMO other than modeling/acting stuff.

http://bakertilly.com/insights/hiring-your-children-tax-savings-and-doing-it-the-right-way/

https://www.nolo.com/legal-encyclopedia/why-its-tax-smart-hire-your-children.html

First off
Quote
The IRS is well aware of the tax benefits of hiring a child, so itís on the lookout for taxpayers who claim the benefit without really having their children work in their businesses. If the IRS concludes that your children arenít really employees, youíll lose your tax deductions for their salary and benefits. And theyíll have to pay tax on their benefits.


Quote
The IRS wonít believe that an extremely young child is a legitimate employee. How young is too young? The IRS has accepted that a seven-year-old child may be an employee but probably wonít believe that children younger than seven are performing any useful work for your business.

And

Quote
First of all, your children must be bona fide employees. Their work must be ordinary and necessary for your business, and their pay must be for services actually performed. Their services donít have to be indispensable, only common, accepted, helpful, and appropriate for your business. Any real work for your business can qualify. You get no business deductions when you pay your child for personal services, such as babysitting or mowing your lawn at home. On the other hand, money you pay for yard work performed on business property could be deductible as a business expense.

And also

Quote
Finally, you must comply with most of the same legal requirements when you hire a child as you do when you hire a stranger. This means you must fill out IRS Form W-4 and complete U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You must also record your employeeís Social Security number. If your child doesnít have a number, you must apply for one. In addition, you, the employer, must have an Employer Identification Number (EIN). If you donít have one, you may obtain it by filing IRS Form SS-4. You must also complete and file IRS Form W-2 showing how much you paid your child.

So, who says I can't? Frankies Girl, that's who. Great post. Thank you.

I am looking for the best tax-efficient ways for both my toddlers to save for the future and open to suggestions.

SeattleCPA

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #3 on: January 31, 2018, 02:17:02 PM »
This isn't what you're describing, but I think you can hire children with great tax benefits in some situations:

https://evergreensmallbusiness.com/hiring-your-children-as-a-tax-loophole/

The trick is, you need to be able to give them a real job.


KBecks

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #4 on: January 31, 2018, 02:22:50 PM »
I think you could give her a legitimate modeling job for your business.  Check with your accountant.

sol

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #5 on: January 31, 2018, 02:47:36 PM »
If I wanted to hire my underage kids, modeling would be my choice.  There aren't many kinds of paid work that children can legitimately do, but being cute for the camera is one of them.

Of course, without a buyer you're going to lose more money on your home photography business than you're going to save on the kid's tax deferred earnings.  Which is maybe fine, if you like photography anyway.  Lots of people start hobby businesses they know will fail, in order to get the business deductions. 

GOFU

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #6 on: January 31, 2018, 03:09:00 PM »
So no wages for romper room operations. That's what she's best at. But she is adorable so I like the modeling idea. I don't really care about losing money on her wages. I would just give it to her if it achieved the goal. The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor.

Thanks for the responses.

SunshineAZ

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #7 on: January 31, 2018, 03:09:35 PM »
I worked for my mom starting when I was around 13, but I worked in her beauty salon sweeping hair, cleaning up, and running errands, etc.  I don't know how they claimed it on their taxes, but I know it was claimed, because it shows up in my Social Security work history.  Granted the amount was very small, like between $500 and $1,400 annually, until I got older and had a real job.   I was shocked when I first noticed it on there, as I had forgotten all about it. 

SeattleCPA

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #8 on: January 31, 2018, 03:28:54 PM »
I think you could give her a legitimate modeling job for your business.  Check with your accountant.

I used to put pictures of me and my kids on the about the author page in my books in the 1990s... then pay them... then put the money into their IRAs. (Roths didn't exist at the time.)

Modeling fees for anyone, including children, are generous. That said, $500 a month seems a little rich. (Back in the day--25 years ago--I think I paid them $500 or so.)

sol

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #9 on: January 31, 2018, 03:32:50 PM »
I don't really care about losing money on her wages. I would just give it to her if it achieved the goal. The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor.

I wasn't clear.  You're going to lose money to FICA taxes on whatever the kid earns, approximately 15% off the top.  Even if her tax bracket is zero, everyone who has earned income pays FICA.  She needs earned income to qualify for a Roth IRA.

So the key is deciding whether the tax deferral on her earnings are worth paying 15% up front and thus only investing 85% of the total amount. 

Personally I think you're better off with an HSA529, which offers similar tax benefits and no FICA, if she's going to spend any money on education at any point in her life.

Keep in mind that as soon she gets her first real job, you can max out the IRA for her (up to the amount of her total earnings) whether she contributes a dime or not.  That seems like an easier way for parents to start their kids off right, and it confers tax deferral while staying inside the gift tax limits.
« Last Edit: February 01, 2018, 11:52:33 AM by sol »

GOFU

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #10 on: January 31, 2018, 03:41:04 PM »
I don't really care about losing money on her wages. I would just give it to her if it achieved the goal. The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor.

I wasn't clear.  You're going to lose money to FICA taxes on whatever the kid earns, approximately 15% off the top.  Even if her tax bracket is zero, everyone who has earned income pays FICA.  She needs earned income to qualify for a Roth IRA.

So the key is deciding whether the tax deferral on her earnings are worth paying 15% up front and thus only investing 85% of the total amount. 

Personally I think you're better off with an HSA, which offers similar tax benefits and no FICA, if she's going to spend any money on education at any point in her life.

Keep in mind that as soon she gets her first real job, you can max out the IRA for her (up to the amount of her total earnings) whether she contributes a dime or not.  That seems like an easier way for parents to start their kids off right, and it confers tax deferral while staying inside the gift tax limits.

Great ideas. Thank you.

robartsd

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #11 on: January 31, 2018, 04:25:40 PM »
Most of Frankies Girl's post is about hiring a child in your business.

Your child can also earn income providing you personal services to qualify for their IRA contributions. Assuming your child owns the buisiness that is serving you, the child will be self-employed and owe self-employment taxes if they make at least $400 in any tax year. Earnings after deducting the employer portion of self-employment taxes would be allowable for IRA contribution (you can gift your child the money to pay the employee portion of their self-employment taxes freeing them to contribute all their earned income to the IRA). You could figure out a way to justify paying your child $399.99 each year and put it in a Roth IRA Savings account in the child's name. In the third year, you can rollover to Vanguard and invest in the furthest out Target Date fund ($1000 minimum).

jpdx

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #12 on: January 31, 2018, 04:44:22 PM »
Quote
I used to put pictures of me and my kids on the about the author page in my books in the 1990s... then pay them...

In this scenario, would you have to put the child on payroll as an employee, or just cut them a check?

Undecided

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #13 on: January 31, 2018, 05:00:22 PM »
I don't really care about losing money on her wages. I would just give it to her if it achieved the goal. The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor.

I wasn't clear.  You're going to lose money to FICA taxes on whatever the kid earns, approximately 15% off the top.  Even if her tax bracket is zero, everyone who has earned income pays FICA.  She needs earned income to qualify for a Roth IRA.

If you're addressing hiring the kid for a family business, I don't think that's right in all cases.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Family-Help

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the "Covered services of a child" section below. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.

seattlecyclone

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #14 on: January 31, 2018, 06:15:23 PM »
I don't really care about losing money on her wages. I would just give it to her if it achieved the goal. The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor.

I wasn't clear.  You're going to lose money to FICA taxes on whatever the kid earns, approximately 15% off the top.  Even if her tax bracket is zero, everyone who has earned income pays FICA.  She needs earned income to qualify for a Roth IRA.

If you're addressing hiring the kid for a family business, I don't think that's right in all cases.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Family-Help

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the "Covered services of a child" section below. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.


That's pretty neat! I did not know that. That makes my idea of building a backyard cottage, renting it out on Airbnb, and paying my kids to do the cleaning (when they're old enough) sound just a little bit cheaper.

sol

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #15 on: January 31, 2018, 06:21:45 PM »

If you're addressing hiring the kid for a family business, I don't think that's right in all cases.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Family-Help

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes

Sweet deal!  Man, having kids is like the best tax dodge ever.

Undecided

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #16 on: January 31, 2018, 07:22:35 PM »

If you're addressing hiring the kid for a family business, I don't think that's right in all cases.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Family-Help

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes

Sweet deal!  Man, having kids is like the best tax dodge ever.

Right after having a small business.
« Last Edit: January 31, 2018, 07:28:45 PM by Undecided »

blinx7

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #17 on: January 31, 2018, 07:40:08 PM »

The likelihood of you going to jail for tax fraud is probably pretty low.

That being said, as the parent of a four year old with some fresh cash lying around, I personally will never do this.

GOFU

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #18 on: January 31, 2018, 08:36:42 PM »

The likelihood of you going to jail for tax fraud is probably pretty low.

That being said, as the parent of a four year old with some fresh cash lying around, I personally will never do this.

You'll never do what? Pay your child to work? And create the opportunity to teach her at a young age the value of earning, and how to wisely and shrewdly save and invest her earnings within the established rules of the game?

I was being facetious about the $500 value of the services in my original post, and ok I admit 3 years old is a bit young for a useful contribution of services. But I was selling newspapers at 10 years old. I provided a valuable service and people (not my parents) paid me to do it. I was a little kid and had more money than I knew what to do with, storing it in a little gray box under my mattress. Had someone taught me back then to put it in a tax-deferred investment account the amounts would be huge now.

By age 8 or 10 or 12 my kids will also be fully capable of providing some useful service, just like I was, and I will teach them while they are still children the value of work, the power of tax-deferred saving and investing and all the valuable economic insight, as well as financial gain, that come with those lessons. I love them too much not to.

mattcuffCPA

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #19 on: January 31, 2018, 08:56:16 PM »
Pretty good article on Bigger Pockets on this topic,

https://www.biggerpockets.com/renewsblog/stop-contributing-529-plans/

Basically it is a great strategy but you need to have a real business and you need to give your Kid reasonable wages for a real job that they are capable of doing.

alanB

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #20 on: February 01, 2018, 11:17:12 AM »
Pretty good article on Bigger Pockets on this topic,

https://www.biggerpockets.com/renewsblog/stop-contributing-529-plans/


Definitely a good article.  Just want to point out that for some people, especially once FIRE'd, state taxes could exceed federal tax rate.  Then I think 529 makes more sense.

cchrissyy

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #21 on: February 01, 2018, 11:34:36 AM »
"The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor."

You could skip the IRA and get those same years of compounding growth in a normal brokerage account, while hoping the tax rate on long term capital gains stays at 0%.  Obviously that's not guaranteed to stay the same over her long lifespan but neither are the laws about IRAs.

sol

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #22 on: February 01, 2018, 11:50:26 AM »
"The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor."

You could skip the IRA and get those same years of compounding growth in a normal brokerage account, while hoping the tax rate on long term capital gains stays at 0%.  Obviously that's not guaranteed to stay the same over her long lifespan but neither are the laws about IRAs.

The taxable account protects capital appreciation with a 0% LTCG rate, but it will still tax dividends and interest payments.  You can minimize that by buying stock index funds (less than 2% dividends right now) or BRK instead of bonds or dividend payers.

I still think a 529 is an easier way to accomplish the same goal.

SeattleCPA

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #23 on: February 01, 2018, 01:52:35 PM »
Quote
I used to put pictures of me and my kids on the about the author page in my books in the 1990s... then pay them...

In this scenario, would you have to put the child on payroll as an employee, or just cut them a check?

I paid them as 1099 contractors, which was the industry standard (I believed) for models.

BTW, the minor children of a proprietor can't work for an S corporation and still sidestep payroll taxes. Which is also why I didn't do payroll too.

Also that evergreen small business blog post I pointed to earlier in thread provides, I think, a more business friendly discussion of how the payroll tax thing works for minor children.

Undecided

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #24 on: February 01, 2018, 03:46:14 PM »
"The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor."

You could skip the IRA and get those same years of compounding growth in a normal brokerage account, while hoping the tax rate on long term capital gains stays at 0%.  Obviously that's not guaranteed to stay the same over her long lifespan but neither are the laws about IRAs.

The taxable account protects capital appreciation with a 0% LTCG rate, but it will still tax dividends and interest payments.  You can minimize that by buying stock index funds (less than 2% dividends right now) or BRK instead of bonds or dividend payers.

I still think a 529 is an easier way to accomplish the same goal.

But if the kid just has a modest investment (maybe $100,000 in the low-dividend index you've proposed) and doesn't have earned income (perhaps the opposite of where the OP was going!), child and parent can shield the dividend/interest anyway (I think up to $2,100/year), if it's in the child's account (e.g., an UTMA account).

https://www.irs.gov/taxtopics/tc553

GOFU

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #25 on: February 01, 2018, 06:48:09 PM »
"The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor."

You could skip the IRA and get those same years of compounding growth in a normal brokerage account, while hoping the tax rate on long term capital gains stays at 0%.  Obviously that's not guaranteed to stay the same over her long lifespan but neither are the laws about IRAs.

"The goal is to get her into a tax-deferred investment account at 3 so as to have all those years in her favor."

You could skip the IRA and get those same years of compounding growth in a normal brokerage account, while hoping the tax rate on long term capital gains stays at 0%.  Obviously that's not guaranteed to stay the same over her long lifespan but neither are the laws about IRAs.

The taxable account protects capital appreciation with a 0% LTCG rate, but it will still tax dividends and interest payments.  You can minimize that by buying stock index funds (less than 2% dividends right now) or BRK instead of bonds or dividend payers.

I still think a 529 is an easier way to accomplish the same goal.

I like this suggestion as a possible alternative. So please forgive my ignorance, but I don't understand the part about the LTCG rate at 0%. If a child invests in a normal brokerage account at 3, and sells the appreciated asset at age 50, why would the LTCG be 0%?

My plan is not designed to pay exclusively for educational expenses, so whether we need a 529 is a separate issue for me.

The instability of the tax laws is not something I am worried about either. I want to leverage the existing rules as well as possible and if the winds shift then we will simply have to reset the sail as best we can.

sol

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #26 on: February 01, 2018, 07:01:55 PM »
If a child invests in a normal brokerage account at 3, and sells the appreciated asset at age 50, why would the LTCG be 0%?

Because the American tax system favors passive income over earned income?

The long term capital gains tax rate is officially 0% if you are in the 15% tax bracket, which is currently about $77k/year for MFJ.  That means you pay nothing, as long as you realize less than $77k of capital gains each year, assuming no other income in retirement.  It used to be a lot higher, under the old system in 2017, because it was the 15% bracket on top of deductions and exemptions, but those don't exist anymore.

The tax rate on investment earnings is pretty darn favorable even at higher levels.  If you make ten million dollars per year in income you pay approximately 40% of income taxes, but if you sell ten million dollars worth of capital gains you only pay the 20% LTCG rate.  The system is designed to penalize people who work and favor people who inherit.

And that's the easy answer, for most people who want to gift their kids.  Just use your regular tax-advantaged space as much as possible (including dodges like businesses and real estate), make annual gifts up to the gift tax limit, and then pass the rest on to your kid tax free upon death (assuming you pass less than $11million).

edit: adjusted dollar amounts from 10 to 15% bracket.
« Last Edit: February 01, 2018, 10:29:00 PM by sol »

swampwiz

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #27 on: February 01, 2018, 09:56:09 PM »
That would be illegal child labor in addition to being illegal in the hands of an angry tax collector.

Undecided

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #28 on: February 01, 2018, 10:12:19 PM »
If a child invests in a normal brokerage account at 3, and sells the appreciated asset at age 50, why would the LTCG be 0%?

Because the American tax system favors passive income over earned income?

The long term capital gains tax rate is officially 0% if you are in the 15% tax bracket, which is currently about $19k/year for MFJ.  That means you pay nothing, as long as you realize less than $19k of capital gains, assuming no other income in retirement.  It used to be a lot higher, under the old system in 2017, because it was the 15% bracket on top of deductions and exemptions, but those don't exist anymore.


I think itís decoupled from brackets now, but would be zero for MfJ up to $77,200/year.
https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

sol

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #29 on: February 01, 2018, 10:29:54 PM »
I think itís decoupled from brackets now, but would be zero for MfJ up to $77,200/year.
https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

You're right, of course, and I should have known that $19k number was way too low.  That's the top of the previous bracket, or the bottom of the correct one.  Thanks for keeping an eye out for us.

blinx7

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #30 on: February 02, 2018, 09:41:38 AM »

The likelihood of you going to jail for tax fraud is probably pretty low.

That being said, as the parent of a four year old with some fresh cash lying around, I personally will never do this.

You'll never do what? Pay your child to work? And create the opportunity to teach her at a young age the value of earning, and how to wisely and shrewdly save and invest her earnings within the established rules of the game?

I was being facetious about the $500 value of the services in my original post, and ok I admit 3 years old is a bit young for a useful contribution of services. But I was selling newspapers at 10 years old. I provided a valuable service and people (not my parents) paid me to do it. I was a little kid and had more money than I knew what to do with, storing it in a little gray box under my mattress. Had someone taught me back then to put it in a tax-deferred investment account the amounts would be huge now.

By age 8 or 10 or 12 my kids will also be fully capable of providing some useful service, just like I was, and I will teach them while they are still children the value of work, the power of tax-deferred saving and investing and all the valuable economic insight, as well as financial gain, that come with those lessons. I love them too much not to.

To be more specific, I was referring to the age and the tax structuring component and not to paying your child.  Three is too young.  I haven't researched the rules but 12 seems fine.  In between I would research the rules and go from there (this is not legal advice, just how I would approach it). 

My four year old daughter gets a quarter when she helps with chores.  If I were an IRS agent, I would assume that was around the going rate. 

SeattleCPA

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #31 on: February 02, 2018, 10:54:39 AM »
I think itís decoupled from brackets now, but would be zero for MfJ up to $77,200/year.
https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

You're right, of course, and I should have known that $19k number was way too low.  That's the top of the previous bracket, or the bottom of the correct one.  Thanks for keeping an eye out for us.

But Sol's original point is right on... you can have a lot of money but if it's all generating qualified dividends and long-term capital gains you pay zero income taxes.

E.g., $5M in your Schwab account, a handful of itemized deductions, a low fix figure AGI... and you may still pay zero income taxes.

Undecided

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #32 on: February 02, 2018, 12:32:05 PM »
I think itís decoupled from brackets now, but would be zero for MfJ up to $77,200/year.
https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

You're right, of course, and I should have known that $19k number was way too low.  That's the top of the previous bracket, or the bottom of the correct one.  Thanks for keeping an eye out for us.

But Sol's original point is right on... you can have a lot of money but if it's all generating qualified dividends and long-term capital gains you pay zero income taxes.

E.g., $5M in your Schwab account, a handful of itemized deductions, a low fix figure AGI... and you may still pay zero income taxes.

In the abstract, sure, but circling back to something like the prompt, how does it fit with QDI and LTCG for a child while the parent is still working (and making ordinary income already above the 0% LTCG zone)? Doesn't that subject the child's unearned income (if above the $2,100 limit) to parent rates? My kids have modest UTMA accounts and no earned income, so unless I forget for a few years in a row, I'm sure I'll be able to harvest their gains below the $2,100 limit annually and they'll be tax free. I like this better than pushing it off entirely on the presumption that similar LTCG/QDI treatment will be available when they're adults (and that they'll be below whatever relevant income limits).

SeattleCPA

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #33 on: February 02, 2018, 01:06:27 PM »
I think itís decoupled from brackets now, but would be zero for MfJ up to $77,200/year.
https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

You're right, of course, and I should have known that $19k number was way too low.  That's the top of the previous bracket, or the bottom of the correct one.  Thanks for keeping an eye out for us.

But Sol's original point is right on... you can have a lot of money but if it's all generating qualified dividends and long-term capital gains you pay zero income taxes.

E.g., $5M in your Schwab account, a handful of itemized deductions, a low fix figure AGI... and you may still pay zero income taxes.

In the abstract, sure, but circling back to something like the prompt, how does it fit with QDI and LTCG for a child while the parent is still working (and making ordinary income already above the 0% LTCG zone)? Doesn't that subject the child's unearned income (if above the $2,100 limit) to parent rates? My kids have modest UTMA accounts and no earned income, so unless I forget for a few years in a row, I'm sure I'll be able to harvest their gains below the $2,100 limit annually and they'll be tax free. I like this better than pushing it off entirely on the presumption that similar LTCG/QDI treatment will be available when they're adults (and that they'll be below whatever relevant income limits).

You're right. The kiddie tax may apply. But probably we also want to think about the realized preferentially taxed income the kid earns.

If the dividend yield is 2% ish, kid needs more than $50K to be subject to any taxes and more than $100K to be subject to parent's top rates.


BTDretire

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #34 on: February 04, 2018, 09:44:58 AM »

If you're addressing hiring the kid for a family business, I don't think that's right in all cases.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Family-Help

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes

Sweet deal!  Man, having kids is like the best tax dodge ever.
nurse,
 Ya, it would be great deal, IF you didn't need to feed, cloth, house, transport, nurse, educate, entertain and a few other costly items. It's kinda like having a business, it would be great if it wasn't for those darn customers. :-)

Sarcasmancer

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #35 on: February 09, 2018, 02:22:26 PM »
A paid tax preparer who signed off on this would be subject to a penalty of "the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund." I don't know what the penalty would be for you as an individual filing your own.

startbyservingothers

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Re: I want to hire my 3-year-old so she has earnings for an IRA
« Reply #36 on: February 09, 2018, 07:33:59 PM »
First, I like this thread.  I've spent some time thinking about this and my plan was something along the lines of:

1. Encourage my kid to work in the neighborhood.  - Mow lawns, paint mailboxes, shovel snow, sell something, anything we can think of.  Money from a 3rd party is much easier to substantiate.

2.  Have a website, record-keeping, or something ridiculously simple anyone can do.

3.  Document everything.

4.  Only report actual earned wages.* 

Seems pretty strait forward.   But I wouldn't see starting this before age 5-6 with the possible exception of modeling I see listed here.  (But would this really be considered "Earned " income for a toddler.  I don't have the time to Google that currently).   * - At a younger age the amount earned and reported would be small, maybe a couple hundred dollars total the first year.  Just like adults they will probably be able to earn more each year.  - Documenting your "child prodigy" will probably be needed for anyone reporting income prior to 12 in this day in age.  -  I fully expect IRS agents to be shocked that ANY child (As in under 18) is capable of doing ANYthing in this day in age.


As far as the $1050/$2100 unearned income limits, I've pondered what ways there are to maximize that .    The challenge I see is opening an interest bearing account that is worthwhile enough to put your money even with tax free earnings.  (Only certain banks / accounts allow very young children to sign up.)  Too bad places with huge checking bonuses don't allow infants / toddlers to sign up.
« Last Edit: February 09, 2018, 07:40:23 PM by startbyservingothers »