First problem: Generally you cannot deduct the cost of hiring folks to do yardwork or clean the house from your own income.
Second problem: If the kid is earning $12,000 in self employment income and claiming it on a tax return, they'd owe an awful lot in self employment tax (15.3%)
What about a rental property. Granted a 2 year old might seem a little extreme, but what about:
1. Gift a rental property to your 10-12 year old or older child.
2. File form 709 so the gift is excluded from taxes ( the value will count toward the lifetime gift exclusion about to double in the new tax plan ($22 million for MFJ)
3. The 10-12 year old now actively participates in the running of the business, including the accounting, hiring handyman, painting, etc.
4. No FiCA taxes on rental income.
5. First 12,000 of income is tax free for that child.
6. YOUR income has dropped by the value it was increased to your child
7. Depreciation (I believe taking it is still MANDATORY) will further decrease annual income for 25 years or so for the child.
8. Rinse and repeat until the full 12,000 is utilized.
Could buying a REIT achieve the same result without doing the actual management?
Disadvantage is you no longer control the property. That could be mitigated in several ways, including taking away the child's cell phone for a week (remember, they are 12 :)
This would be a strategy for excess, not funds you need during your life. It is based on the idea of treating all monies in the family as sort of a pseudo "radram Inc.", where the strategy is to maximize revenues while minimizing expenses. Under those terms, it makes little difference if the home is mine, my wife's, my child's, etc. We are all in this together.
I really think this Form 709 thing is way under-reported, especially when they were talking about the full repeal of the estate tax.
Thoughts?