Before the tax year of 2018, we were able to claim personal exemption amounts based on the number of the dependents claimed plus ourselves; hence, the family with more children is entitled to deduct more.
In December 2017, Congress passed a new tax law that eliminated the children’s dependency exemptions. The Tax Cuts & Jobs act of 2017 went into effect on January 2018. The new federal tax law reduces the dependency exemption for each child to $0 and raises the standard deduction. The Children’s dependency exemption will remain in effect until 2025.
Now that we got away from the personal exemptions, do the families who have more kids still have any “leverage” over those have less?
For self-employed and/or business owners, the answer is still affirmative depending on if or when they put their minor children (under age eighteen) to work. Theoretically, they need not to pay payroll taxes for wages up to $18,000 per tax year. Is it too good to be true? Please allow me to lay out the pros and cons below for you, and you be the judge:
PROS: Once the children have “earned income”, they will be permitted to set up and contribute to their individual retirement accounts.
CONS: Once you have more than one “employee” on payroll, the business will need to get Worker’s Compensation Insurance. Depending on the type of business, and some other variables, the insurance premiums may or may not exceed the payroll taxes saved.
PROS vs CONS:This is good and bad for setting up their retirement account; if they open a ROTH IRA (Individual Retirement Account) and certain “requirements” are met, they could withdraw money free of taxes. On the other side of coin, if they apply for college, the ROTH IRA will be listed as their “assets” which will count against their application for scholarship opportunities.
Now, let’s take a step back and talk the logistics of “hiring” your own children. The position must be legit and compatible with the “ability” of the kids, and their compensation are to be reasonable and customary. Ideally, using a time sheet that tracks the children’s work hours could provide appropriate “proof”/basis of their pay in case of an audit (as likely as it may seem).
What can children do to help out? How about having them shred documents? Sort or open mail? Clean the office space? Organize files? Just to name a few. Having them do more “advanced” duties such as: market research or social media posting can be great experiences that can be added to their college applications, couldn’t they?
Personally, for me to have a “personal assistant” 24/7 within reach is truly helpful. I could dictate and watch over my child’s shoulder to see her ‘work” and ensure she does them correctly the first few times and be “bossy”!
Instead of training other employees, I found it even more satisfying to teach my own flesh and blood about the necessity of having a strong work ethic and maintaining professional business etiquette. She, on the other hand, appreciates and understands the demand of my profession. My child has the on-the-job training and experience that will help her decide whether she likes what I do. If she does, then I would be able to have her succeed me in the future.
After your children turns age eighteen, is it game over? Not quite. One possible scenario would be to consider investing in your “adult” children’s names before they reach age twenty-two (or before they start making huge amount of income). This can save a considerable amount of income taxes for money made in brokerage accounts.
What is the downside of this strategy? The children are legally owners of the investment accounts (although it’s your hard-earned money). They could literally do whatever they please with the investment account without your permission… So think hard and think twice…for the unthinkable.
Lastly, I just want to share with you a question that was asked before – “Can I deduct my pet?”. The answer is: “Sure you can, if the pet has a social security number.” With all kidding aside, your children or any dependents, need social security numbers to be claimed on your income tax returns.
For those of you want to hire your children, please consult your CPAs and ensure all your papers are in good order. I am here to help if you need further assistance or encounter any questions. Enjoy your little ones because they grow up so quickly!
To the best of my knowledge and effort, I wrote this article in general terms as each person’s situation varies. Tax laws do change from time to time. No guarantee is made or claimed through this article. Personalized advice is recommended to consult’s one’s own advisor or contact the author.