Numerous years ago, a “kiddie tax” was enacted to prevent parents from placing investments under a child’s name to benefit from lower tax rates. As a result, the child’s unearned income beyond a certain amount was taxed at the parent’s highest marginal tax rate instead of a lower rate. The latest round of tax reform again changed how children are taxed by taxing unearned income at higher fiduciary income tax rates. What should you know about taxes with children between the ages of 18-24?
Your child’s income earned from working will be taxed at a single rate, which is great news tax-wise. The standard deduction increased to $12,200 for single filers, which means that your child can make up to that amount and pay no income tax. If your child is also interested in contributing to an IRA, they could increase that income to $18,200 from working before needing to pay federal tax.
Some children are less than enthusiastic about contributing to an IRA or retirement savings account, but they are an excellent way to start saving for the future and practice excellent tax planning. You or a grandparent can gift an IRA contribution to the child. Roth IRAs will give your child tax-free income at the time of their retirement. However, since Roth IRA contributions are not tax deductible, your child would be responsible for paying income tax on their earnings beyond $12,200.
Employ Your Child
If you are self-employed, one of the best ways to help your child with tax-free income is by hiring them at your business and paying them a salary no higher than $12,200, or $18,200 if you plan on making in IRA contribution on their behalf. Providing that the job is legitimate and the pay is appropriate for the hours and job, your payments will not be subject to FICA taxes on your end or your child’s end. If you own a family business and are self-employed, this is a great way to employ your child and offer them additional income while financially benefitting both parties and granting them work experience.
Skilled Tax Planning with Miles Tax Advisory
If you are interested in exploring tax planning strategies involving your young adult dependent or other ways to minimize your tax burden this year, we are always here to assist you!