Children have the ability to earn $6,100 per year and pay no tax. They have the ability to earn in a number of different ways, including from their own labor, either working for someone else or working for their parents. Children also have the ability to be compensated for the use of their image in advertising or any other profitable venture. These earnings will vary depending upon what they do and how creative their parents can be at utilizing their image and profitable endeavors and then compensating them for that employment.
The children’s income does not interfere with the parent’s ability to take that child as an exemption on their own return. The reason children do not incur any tax is that they are allowed a standard deduction of $6,100, thus eliminating any taxable income up to that amount. In essence, sure we have an ability to make a totally tax-free income of $6,100 per year.
Taking this one step further, the amount that can be contributed to their own IRA would be $5,500 per year. Thus, taking this one step further and projecting their IRA savings at the maximum current amount for just 10 years would produce $55,000 of IRA savings before their 18th birthday. After they are 18, no additional contributions would be made, but at their own discretion they could make contributions throughout their life.
The pot of gold at the end of the rainbow for the child from these 10 years of contributions early in life and leaving them compound at the average stock market rate of return would produce earnings of $2,374,704. At age 59 1/2, this balance could be the distributed tax-free. Any additional contributions made by the child/individual later in life would only increase this retirement account substantially.
This is a way to substantially offer a child an extremely good start in life as well as obtain a possible tax deduction if that child is working within your business.
• Ken Lindow, CPA, CGMA, MBA, lives and works in Ahwatukee Foothills. Contact him with tax questions or column topic ideas at (480) 940-8351 or Ken@LindowCPA.com.