Deduct the Cost of your Kids

Do you spend a lot of money on your kids? Maybe you provide them a weekly allowance on top of the clothes that they grow out of and food that they eat so much of! (except for the picky eaters).

 Wouldn’t it be nice if you could get some help from Uncle Sam? I know a few real estate investors who are getting Uncle Sam to pitch in. They are writing off the money they spend on their kids! How can this be you say? My tax guy told me that giving my money to my kids is a personal expense and I cannot write that off.

While the above is true in most cases, I will tell you that real estate investors are writing off money paid to their kids, and it is perfectly legal. In fact, Uncle Sam wants you to do it. You see, tax incentives are used to promote social well-being and paying your kids can do just that. Read on.

As a Real Estate investor, you are running a business. As a business owner, you can hire your kids to work in the business.

The basic mechanics of this are (a) you deduct the wages and (b) your child pays zero or very little in income taxes. The three points below elaborate on this: 

  1. The child (a single taxpayer) pays zero taxes on earnings up to the $12,000 standard deduction amount. Say you pay tax-deductible wages of $12,000. This reduces your taxes or gives you tax refunds. And the child pays no taxes. The government is the only player who is out any money.

  2. The child can use the traditional IRA to avoid taxes on $5,500, for a total of $17,500 on which he or she can avoid taxes. You can pay this amount and reduce your taxes.

  3. The child can use the 10 percent tax bracket, standard deduction, and traditional IRA to pay itty-bitty taxes on earnings up to $27,025 while you reap the tax benefits of paying your child this much larger amount. 

To get this right, you need to pay the child on a W-2, have the child keep a time sheet, and create proof of a reasonable wage.

And you will be happy to know that the IRS has approved employing children as young as seven years old.

Here’s another benefit: If the child working for a parent is under age 18, both the child and the parent or parents are exempt from payroll taxes. In these cases, the parent operates a Schedule C business, or both parents are the sole owners of a partnership or LLC taxed as a partnership.

Corporations are not parents. They do not qualify for this exemption from payroll taxes. Even so, corporate hires of the owner’s children usually produce good tax benefits.

Remember I mention how tax incentives promote social well-being? What better way to produce a productive member of society than teaching your kids work ethic and business skills at a young age! This is what the Government wants.

In summary, all business owners can achieve tax benefits by hiring their children, regardless of the type of business entity. But parents who are Schedule C owners or in spousal partnerships achieve more benefit because neither they nor their under-age-18 children are subject to payroll taxes.

Happy investing!