Hire Your Child for the Summer

Hire Your Child for the Summer if you own your own business, you may want to think about employing your child for the summer. Not only will your child learn some valuable workplace skills, but you could reduce your taxes, too.

Tax Savings

Hiring a child can be a legitimate income-shifting tool. The wages you pay your minor child can qualify as a deduction from your business income, which would otherwise be taxed at your own rates. In addition, your child would be able to offset the wage income with his or her own standard deduction ($6,200 in 2014) and then have the rest taxed at his or her lower rates. For 2014, a 10% rate applies to taxable income of $9,075 or less.

Requirements

For your child\’s wages to be deductible, the work he or she does must be done in connection with your trade or business, and the services your child performs must be reasonable in relation to the wages paid. You should be able to document that the usual conditions of employment such as duties, regular hours, and wages were agreed on and adhered to just as with any other employee.

Another Potential Advantage

If you are a sole proprietor – or operate a partnership with only your spouse wages paid to your child would be exempt from Social Security arid Medicare (FICA) taxes until your child turns 18 and from federal unemployment taxes until age 21.

Filing Trust and Estate Income-tax Returns

Serving as a trustee or the executor (personal representative) of an estate can be a challenging job. Among other responsibilities, there may be an ongoing obligation to file income-tax returns for the trust or estate.

Income Thresholds

Generally, a trustee rinisi, file a fIeraI income-tax return if the trust has any taxable income or if it has gross income of $600 or more. The executor of an estate must file a return if there is gross income of $600 or more. Like individuals, estates and trusts are able to use both personal exemptions and certain deductions to reduce their taxable income. Both trusts and estates file their income-tax returns using Form 1041.

Filing Deadlines

The return is due by the fifteenth day of the fourth month following the end of the tax year. Trusts must generally use a calendar tax year, while estates may adopt either a calendar year or some other (\”fiscal\”) year. Executors ofestates should give careful consideration to this decision because a fiscal year may provide tax-deferral opportunities for both the estate and the beneficiaries. If a fiscal year is chosen, the rules require that it conclude at the end of a month and that it be no longer than twelve months. For example, if the decedent died on September 14 of Year 1, the longest possible fiscal year would end on August 31 of Year 2.

Other Considerations

Because the income-tax brackets for trusts and estates are tightly compressed meaning that the highest rates are triggered quickly trustees and executors have an incentive to distribute income to the beneficiaries so it will be taxed at their rates. A distribution will generally require sending a completed Form K-i to the beneficiary on or before the date Form 1041 is filed.

Our firm can help with tax planning for trusts and estates and prepare the required returns. Contact us if we can be of assistance to you.

The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.

More Audits

Taxpayers subject to IRS correspondence audits – audits usually focused on a narrow issue in only one tax year – may soon find that the IRS will be looking at other tax years as well. A recent study by the Treasury Inspector General forTax Administration (TIGTA) discovered that a significant number of the taxpayers involved in correspondence audits had underreported their tax liability in other years, As a result. ttle IRS will develop criteria for expanding Buch audits..

First RMD

Generally, the first required minimum distribution (RMD) from retirement plan accounts and traditional (not Roth) individual retirement accounts must be taken by April I oj the year aft~r the account owner turns 70)1,. An exception may apply for non-5% owners who have not yet retired, but only for participants of certain retirement plans. Far those who fail to take a timely RMD, the IRS may assess a penalty of 50% of the required distribution (minus any distribution actually taken).