Jun 01, 2017
By Sarah Ensminger, Senior Accountant at Terry Lockridge & Dunn
Memorial Day is behind us, so that means summer is officially here! Summer not only ushers in warmer weather, but it also means students are out of school and your son or daughter may be looking for a part time job. Here are a few tips and planning ideas to help save you time, money and taxes next filing season when your child’s W-2 comes in the mail:
- Have them claim “exempt” on their W-4. If your child’s total income is less than $6,300 during 2017, and they will also have less than $350 of investment income (which includes interest income, dividends & capital gains), they will not owe any income tax for federal purposes. This saves you from filing a tax return just to get their federal or Iowa withholding refunded to them next April. This is assuming you are claiming your child as a dependent on your return. The Iowa threshold to not file for a dependent is $5,000 of total income.
- Hiring your children can lower your tax bill. If you own your own business as a sole proprietor, single-member LLC or husband-wife partnership, you can hire your kids who are under 18 and no FICA tax will be due on their wages. Another benefit - wages paid to them are tax deductible for your business! Also, federal unemployment tax is not owed on their wages until they reach age 21.
- Consider contributing to a Roth IRA for your child. If your child has earned income, you can contribute up to the maximum of $5,500 to a Roth IRA, but not more than what the child has earned during 2017. Starting tax deferred savings at the youngest age possible is always a great idea. For example, if a child contributes $5,500 to a Roth at the age of 16 and it earns a 7% rate of return each year, it has the possibility to grow to $151,000 at age 65. With a Roth, all withdrawals made after age 59 ½ are tax-free; and if a child is purchasing a first home, up to $10,000 of earnings can be taken out tax-free for the down payment before age 59 ½.
If your child will have more than $350 in investment income, their total income cannot be more than $1,050 or else they will need to file a federal tax return and may owe some tax.
Any one, or all of these ideas, may be beneficial for your child. If you would like to discuss your specific situation, feel free to reach out to Sarah at email@example.com, or contact your accountant.