Are Your Children Being Robbed by Uncle Sam?

Surprise, would you believe that Uncle Sam has instituted yet another way to obtain more tax from the "well to do?" Truthfully, it’s not simply the well to do, but everyone who wants to do some tax planning using their kids will have to pay the piper. It is a popular tax planning practice to "shift income" from family members in a higher tax bracket to family members in a lower tax bracket. Wealthy families have used this tax planning method very successfully for generations. Using this method, Mom and Dad move a money making asset to the children’s ownership so the income will come to the children. The kids don’t earn as much total income as Dad, so they are in a lower tax bracket. Consequently, on the income from the children’s assets the family saves ten or fifteen percent on taxes. It’s just plain smart to shift income. It is not unusual to see professionals rent their business equipment from a second company they have formed to hold that equipment. Would you be surprised to learn that the company that holds the equipment is "owned" by the children? Accordingly, the professional’s business deducts the rent on his taxes and the children get paid the rent. They are making less money than the professional, pay less tax, and the net result is to get more money in the family’s pocket.

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A little bonus achieved by shifting income in today’s tax environment is shifting income lowers 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.

To thwart the practice of shifting income, some time ago Congress passed the "kiddie tax". Shifting income has had its wings clipped by Congress, but it is still an important device in avoiding taxes. The income shifted to the children is "unearned income". They didn’t earn it by working, it came from rent.

It didn’t come as a result of their labor. It resulted from rent paid to them. Unearned income is taxed by the kiddie tax it is not required on earned income. Earned income is the income an individual earns by working with sweat equity.

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 was 14 years until just recently. The age becomes 24 years old, not 18, when the child is a student and Mom and Dad claim him as a dependant on their tax return. No, the tax isn’t fair. Stocks, bonds, real estate, and other income producing assets will be taxed at Dad’s rate, even if your child has worked hard and bought them with his or her own money. It doesn’t matter that Dad had nothing to do with the acquisition of the asset.

Annually, each "child" gets an unearned income tax credit of around $2,000. As a result, the first $2,000 in unearned income won’t be taxed. Until the $2,000 limit is reached by each child, the kiddy tax doesn’t start.

My study course, the Accumulation and Preservation of Wealth gives a detailed discussion on the kiddie tax and talks about other ways to get income to the kids.

How do you "get income down to the kids" without worrying about the kiddie tax? There are a number of ways. Hire the kids, for example. Suppose you give your children a job, you won’t have to pay lots of the payroll taxes. But without actually having your kids work a million hours, how can you pay them? There are several good reasons to explain why you are paying a lot to the kids.

You need to do your tax structuring now, so don’t wait. In both your personal life and your business life, the IRS is your major impediment to financial success. If you understand the legal tricks and traps, then you will be able to control your taxes. Don’t miss a detailed explanation of these strategies in the Accumulation and Preservation of Wealth course.

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