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. A popular planning method used by many people is to "shift" income from the high tax rate people in the family to those with a lower tax rate. This tax planning technique and has been used by wealthy families for many years.

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It is a technique that involves Mom and Dad moving a money making asset to the children’s ownership, so the children get the income. Because they are in a lower tax bracket, the kids don’t earn as much income as their parents.As a result, the family saves ten or fifteen percent in taxes on the income from the children’s property.Shifting income is a great idea.Often professionals will hold their business equipment in a separate company they have set up and then their main business rents the equipment from that entity. Would you be surprised to learn that the company that holds the equipment is "owned" by the children? Consequently, the kids get the rent money, and the professional’s business gets a tax deduction for paying 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. Under new tax laws having a lower AGI is a big deal, because an individual’s adjusted gross income is the key element in determining an individual’s tax bracket.

Congress some time ago passed the "kiddie tax" to stop the practice of shifting income. 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". It was a result of rent paid to them. They didn’t earn it by working. Unearned income is taxed by the kiddie tax it is not required on 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 was 14 years until just recently. Now it is 18 years old, and if the child is a student and Mom and Dad claim the child on their tax return as a dependent, the age is 24 years old. No, the tax isn’t fair. Even if the child has worked hard and with his or her own money has bought an income producing asset (stock, bond, real estate, etc.) then any income the child gets from the asset will be taxed at Dad’s rate. It isn’t important that Dad played no part in getting the asset.

Annually, each "child" gets an unearned income tax credit of around $2,000.

Therefore the IRS won’t tax the first $2,000 of unearned income. Before the kiddy tax kicks in, each kid can make up to the $2,000 limit. I talk about other ways to get income to your kids and I give an in depth discussion on the kiddie tax 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. If you hire your children, you will avoid paying lots of the payroll taxes. The difficulty is how can you explain that you pay your children big salaries without having them do a substantial amount of work? There are many ways to justify paying the kids big bucks.

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. Understanding the legal traps and tricks, will enable you to able to manage your taxes .

The best way to be in command of your taxes is to know the legal traps and tricks. In the Accumulation and Preservation of Wealth course, I go through theses strategies in detail.

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