Summer is almost over. Before you know it, kids will be back in school, and the nights will (hopefully) start getting cooler. Now is the perfect time for tax professionals to help their clients think about their children’s taxes.
Whether your clients’ kids are in grade school or college, there are many ways that kids and parents can save money on taxes.
Business Owners Should Hire Their Kids
Are any of your clients business owners? If so, you may want to encourage them to hire their kids to work for their business. Clients can save up to 37% in federal taxes by hiring their children, and an extra pair of hands won’t hurt, either.
Despite the child’s age, if they earn the standard deduction of $12,950 or less, their wages will not be subject to federal income tax. However, the client’s child may have to pay state income tax, depending on the state’s threshold. If the child has any additional income aside from what they earn at your client’s business, they may have to pay taxes on that if it pushes them over the standard deduction threshold.
A couple of tips to remember are that wages must be reasonable to the position, and hours worked must be reasonable. Bonus: If the client owns a single member limited liability company or a partnership among parents and the child is under 18, they won’t pay Medicare or Social Security taxes.
Have Their Children Invest in a Roth IRA
Whether your client’s kids work for their parents or get a summer job, they should consider investing some money in a Roth IRA. This is an excellent opportunity to teach kids to save their money, and it’s advantageous because withdrawals are tax-free in retirement, and money can grow tax-free. There’s no tax advantage in the year of the contribution, but not having to pay taxes in the future as the account grows is very beneficial. Anyone under 50 can contribute up to $6,000 a year to their Roth IRA in 2022.
College Jobs May Avoid FICA
FICA taxes add up to 7.65%, and if a client’s child has a college job, they may be able to earn money and avoid paying into Medicare and Social Security. Certain services performed at an educational institute where the child is studying are exempt from FICA.
If the young adult is interested in working while at college, advise your client to nudge their child to get a job at the educational institute to potentially save $7.65 on every $100 they earn.
Don’t Forget the Dependent Care Tax Credit
Ask your client if they are currently paying for, or have already paid for, summer camp or a child care provider for a child under 13. If the child is a qualifying child, they may be able to claim a dependent care tax credit at the state and federal levels. You’ll need to check the state law for the client, but they may be able to deduct up to $1,050 for a single child or $2,100 for multiple children for the following: day camp, daycare, preschool, before-school programs, and after-school programs. Tax credits are up to 35% of tuition costs, with a cap of $3,000 for a single child and $6,000 for multiple kids as long as the client’s adjusted gross income doesn’t pass a certain threshold.
Have Them Open a College Savings 529 Plan
It’s never too early or too late to start saving for college. Clients who haven’t already taken steps to start saving can open a Savings 529 plan. Although contributions are not tax deductible at the federal level, they may be on the state level. All of the growth, however, is tax-free as long as your clients use the distributions for education-related expenses or tuition.
Take Advantage of College Credits and Tuition Credits
The cost of college tuition rises every year, but your clients can help offset some of these costs by taking advantage of one of the following credits:
American Opportunity Tax Credit (AOTC). For qualified education-related expenses paid for a qualifying student in their first four years of higher education, AOTC provides an annual credit of up to $2,500 per eligible student. If the credit brings your client’s taxes to zero, 40% of the remaining credit can be issued as a refund (up to $1,000). The credit amount is 100% of the first $2,000 spent on qualified education expenses and 25% of the next $2,000 spent for each student.
Lifetime Learning Credit (LLC). The LLC is for qualified tuition and educated-related expenses paid for students enrolled in a qualifying educational institution. Clients can use the credit to help with the cost of undergraduate, graduate, and professional degree courses, including courses that can help improve or acquire job skills. The credit is worth up to $2,000 and can be claimed in any qualifying year. Clients can only claim one of these tax credits each year, so it’s important to weigh the pros and cons of each one to determine the best option.
Bonus Tip: Invest in Yourself and Review Engagements
As an accountant, now is a great time for you to invest in yourself. Invest in coaching. Get your continuing education credits you’ve been putting off. Further, if your engagement doesn’t currently include advising clients around the strategies above, then now is also a great time to add these to your engagement before you provide these services. Make sure that you’re paid your worth.
Often, tax professionals spend a lot of time helping their clients save money. However, you can really stand out by helping your client’s kids reduce their tax burden. The tips above can help.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Kelly Rohrs runs a virtual practice, primarily serving business owners in the professional service and healthcare space.
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