Skip the subsidy and employ your child

Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Do you have children who will go to college in a few years? If you’re already planning for your kids to go to college, it’s never too late to start planning effective and efficient ways to increase your savings, lower your taxes, and improve your chances of receiving student financial aid.

Let’s say you already give your children an allowance. You are already paying out of pocket and you are not getting any tax benefits. With a few changes, you can turn that cash outflow into a tax-deductible expense that can even help your kids save for college. Consider hiring them to work on your business or rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow, or doing clerical clerical work like filing, stuffing envelopes, or printing marketing brochures, you have an additional deductible expense that reduces net income or increases net loss. your business or property.

And for children who earn income in the family business, there is no payroll tax requirement. And if you keep the amount of “earned” income below certain limits, you also won’t be at risk of paying any “child” taxes. (“Children’s” tax limits are adjusted for inflation each year.) In effect, you have transferred the income of a taxpayer with a higher tax rate to a taxpaying child with little or no income.

Now have your child open a Roth IRA with the money you pay them, and they’ll have the added benefit of saving for college tax-free, because Roth IRAs can be used to pay for college tuition without paying a penalty, as long as and when the Roth account has been open for at least five years (restrictions apply).

By lowering your income, you can also lower your Expected Family Contribution (EFC), which is the critical number used to determine the amount and type of student financial aid your child can get for college. The EFC is calculated using a number of things, including the amount and type of parent’s assets, as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the prior year’s assets and income.

So, to improve your chances of receiving financial help, one strategy is to lower your reported income. By employing your child to reduce income from your business or rental property, you may be able to lower your EFC and improve the amount of aid your child receives.

Add a Comment

Your email address will not be published. Required fields are marked *