June 2022
Tax Planning
You’re never too young to … start paying taxes?! This month we talk about Tax Tips for Kids!
Does your child have earned income from babysitting, pet sitting, mowing grass? Have them keep a journal of what they did for work: who they did the work for, the date and the amount they made. Then start funding a ROTH IRA for them! As long as they have earned income, they can make a ROTH contribution up to the amount of their earnings or the maximum for ROTH contributions, whichever is less. This has two benefits: you get to start showing your child the importance of saving early and understanding the concept of money, as well as the ability to develop a healthy balance of tax-free savings for their retirement way, way down the road. Just think of all that compounding!
Do you own a business or rental property? Similar concept as above, as you now become the employer putting them to work on cleaning out rental property or helping in the shop, except now you can also take a tax deduction for your business. Dependent children are entitled to a limited standard deduction (much like we get on our own tax returns) of up to $5400, effectively allowing them to earn money and pay no taxes – and don’t forget to fund that ROTH IRA!
Is your child now in college and working a part time job? If so, and your earned income is above $160,000 (married, filing jointly) then it may help you and your student to file a tax return for them as an independent and not claim them as a dependent on your own return. This would allow them to potentially take the full benefit of the American Opportunity Tax credit of $2500, thereby lowering their taxable income. As it is a credit, they could potentially get cash back, even if no tax is owed.
Do you have US savings bonds that you purchased for your student? US EE or I bonds can be used to pay for college tuition tax-free under certain conditions. Parental income is a main consideration, so if you are married and filing jointly and make in excess of $154,800, the interest accrued on the savings bonds will not be tax free. But wait! There is a loop-hole. If you have a 529 college savings account for your student, you can deposit the savings bonds into their 529 account and this is considered a qualifying deposit, meaning that no tax is due on the bond interest due to the rollover. Distributions from the 529 plan then, assume their normal tax-free status when used to pay qualifying higher education expenses!
With all of these options, details matter, so it would be wise to consult with your tax preparer or cpa before pursuing any of these strategies.
If you have questions, please contact us.
MARKET UPDATE
FINANCIAL PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH
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