Save For College By Paying Your Child(ren)

Consider paying your child justifiable compensation for work performed in your business sufficient to utilize your child's standard deduction and/or lower 10% tax bracket. If your child is under age 18, no return or income taxes are due (social security taxes do apply) if you pay W-2 wages up to: a) $6,300, if your child has NO unearned income, or b) $1,050, if the child has ANY unearned income (i.e. interest or dividends). The Tax
Court has allowed deductions for amounts paid to children as young as 7 years old for tasks such as cleanup chores, message taking and filing. Of course, the amount paid must be reasonable relative to the work done.
Also, you should keep records of hours worked, but the records do not have to be complex. The payments should be made by check. For younger children not yet in college, consider paying your child a justifiable wage so that he/she has earned income in order to set up a Section 529 Plan. The entire compensation amount can be contributed to the plan. The contributions will grow tax free and can be withdrawn tax free for college. When all is said and done, this is a way of deducting amounts you are saving for your child's college education and at the same time using a tax-free method of earning income on the amounts saved. For children who are in college or soon will be, pay your child a justifiable wage and let him/her pay their own college costs. As noted above, if this is your child's only earned income, the standard deduction may reduce the taxable amount of compensation to zero. What remains taxable will be at low rates. If you have any questions or would like to discuss your specific situation, please feel free to contact us.