The concept involves moving a money making asset to the children’s ownership so that any income from the asset will be the children’s and not Mom and Dad. Because they are in a lower tax bracket, the kids don’t earn as much income as their parents. Consequently, on the income from the children’s assets the family saves ten or fifteen percent on taxes. The shifting income idea is huge. It is not unusual to see professionals rent their business equipment from a second company they have formed to hold that equipment. The children in the family own the company that holds the equipment. Accordingly, the professional’s business deducts the rent on his taxes and the children get paid the rent.

The kids pay less tax because they are making less money than the professional so the end result is that the family has more money.

In today’s high tax environment, an additional bonus achieved by shifting income results in lowering Dad’s adjusted gross income, i.e., Dad has a lower AGI. Determining your tax bracket under the new tax laws comes from your adjusted gross income, so having a lower AGI is very important.

Some time ago, Congress passed the "kiddie tax" to halt the exercise of shifting income. Congress has clipped the wings of shifting income, but it is still a great tool in the tax fight. "Unearned income" is the income shifted to the children. It was a result of rent paid to them. They didn’t earn it by working. The kiddie tax is obligatory on unearned income, not earned income. The income an individual earns by his labor is earned income.

The kiddie tax applies to any unearned income for kids up to 18 years of age. It will be taxed at Daddy’s rate. The age of 18 years was just newly legislated; it used to be age 14. If the child is a student and Mom and Dad claim him on their tax return as a dependent, then the age becomes 24 years old, not 18. The tax is discriminatory. An income producing asset (stock, bond, real estate, etc.) that your child has worked hard and bought with his or her own money will still be taxed at Dad’s rate. Suppose Dad had nothing to do with obtaining the asset, that isn’t important.

An unearned income tax credit of around $2,000 each year is given to each "child". So the IRS doesn’t tax, the first $2,000 in unearned income. Until the $2,000 limit is reached by each child, the kiddy tax doesn’t start. I go into the kiddie tax in detail and talk about other ways to get income to the kids in my study course the Accumulation and Preservation of Wealth.

How do you "get income down to the kids" without worrying about the kiddie tax? There are a number of ways. For example, hire the kids. You don’t even have to pay lots of the payroll taxes when you hire the kids. The problem is how do you justify paying the kids a lot of money without having them actually work a million hours. There are many good explanations for paying substantial salaries to your children.

Then again, you need to do your tax structuring as soon as possible. In both your personal life and your business life, the IRS is your major impediment to financial success. The only way you will ever control taxes is to know the legal tricks and traps. See these strategies in detail when you buy my Accumulation and Preservation of Wealth course.

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