If your children go to private school, is their tuition tax deductible? The answer is no. If your teenager goes to summer camp, would the cost be deductible? Again, the answer is no. If you were to pay for your daughter’s college or wedding expenses, would you be able to write-off these costs on your tax return? No!
But how would you like to be able to deduct the equivalent of all that?
The answer is to hire your children in your business. Wages paid to an assistant are deductible to you, coming right off your tax return as a business expense. At the same time, the first $6,300 of the income your children (assistants) earn is tax free to them. Why? Because they get this amount as the standard deduction on their own tax return.
If your children use this money to pay for private school, tennis camp, and weddings, aren’t you getting the equivalent of a deduction for these? Yes!
It’s simply a matter of knowing the tax code and properly documenting your child’s pay according to IRS rules. This includes paying them a reasonable wage for the time and services performed, and documenting their roles and responsibilities with a formal written job description. It also means keeping weekly time sheets, paying by check, and withholding federal and state taxes.
Is it worth it? You be the judge!
If you’re in the 39.6% tax bracket, the first $6,300 paid to your son or daughter produces a tax refund of $2495 from federal taxes alone. If you pay them over $6,300, they would pay some income tax, typically at the 10% bracket. But you would save at the 29.6% rate (39.6 percent minus the 10 percent bracket of your child). Plus, if your business is a sole proprietorship, LLC, or partnership, you are exempt from paying Social Security and Unemployment taxes on their wages if they are under the age of 18
You can even put away $5,500 of your child’s earnings into a Roth IRA, which would allow the interest and appreciation on that money to grow tax free to the child if used for college.
Anchor On This: Tax court rulings support hiring children as young as 7 years old in your family business. The money paid comes off your tax return, and in effect is a way you can have the IRS underwrite the education, weddings and other uses to which the children put their money.