Skip the Allowance and use Your Kid

Do you own investment real estate or a business? Have you been considering buying a rental character or starting a business? Have kids going to college in a few years? If you already plan on your kids going to college, it’s never too late to start planning effective and efficient ways to increase savings, lower your taxes and enhance your odds for receiving student financial aid.

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

By paying them a reasonable wage for sets like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or character.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of “earned” income below certain limits, you won’t be at risk of paying any “kiddie” tax either. (“Kiddie” tax limits adjust for inflation each year). In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the additional assistance of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at the minimum five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the basic number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and kind of parental assets in addition as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to enhance your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental character income, you may be able to lower your EFC and enhance the amount of aid your child receives.

Leave a Reply