Children Can Reduce Your Taxes And Retire Rich

An often-overlooked tax benefit for small businesses, especially home businesses, is hiring your children to work in your business. No, this is not endorsing child labor, but rather having them help out with odd jobs.

Being self-employed, even part-time, you can take advantage of this tax reduction by paying each of your children $4 thousand for doing work for your business. The business gets to take a tax deduction for compensating them and that saves the business taxes, or on the parent's tax return – depending on how the business is organized. And, there is no Social Security or Medicare Taxes due on the wages paid to your children, in part because their income is too low.

Open a Roth IRA for each of your children. Then contribute the $4 thousand to the Roth IRA. A great advantage, your children cannot withdraw funds until they are at least 59 ½. All contributed to the Roth IRA grow tax-free and are not subject to taxation when withdrawn in retirement. On your child's tax return, the child gets no tax deduction for the contributions and the child may not pay any taxes as long as they are at a low enough income, below the threshold of taxation. Best to check with a qualified CPA as rules change all the time.

If you were to do this for 10 years and the Roth IRA earns between 5% and 8% return each year, your child could end up with around $1 to $1.5 million by age 60. If they way until they are 65 to retire it could grow to over $2 million. Of course, it is advisable they also have their own investment strategy as inflation eats away at the value of the fund over time and $2 million will not pay for as much as it does today.

If you are planning on doing this, consult with a CPA or tax professional to be sure your children are performing valid jobs for your business. Also, make sure the work does not violate child labor laws. You want to avoid getting yourself into trouble.

The information herein is not intended as tax advice and I am not a tax advisor or CPA. To comply with IRS requirements, the information in this article should not be used for avoiding penalties under the IRS Code. It is best to check with a qualified CPA as rules change all the time and follow their advise.

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