Your Kids Could Provide You with Bigger Tax Breaks Than You’re Utilizing

Do you have kids that are teenagers?  Are they working for you?  Last night I was out to dinner with some clients and one of them owns a cement company.  He has a joint venture with the Ozinga concrete and construction company.

He was telling the story how he was college roommates with an Ozinga.  He laughs because he had no clue who the family was or what they did.  He said he would constantly give Ozinga crap because he would come in full of cement dust and make the dorm room all dirty.

He recounted asking Ozinga to play basketball at the rec center after class and Ozinga saying he couldn’t because he had to go back to work.  His work?  Going into the large cement mixer and cleaning off the sides.

I guess they used to have to do this manually before a tool was invented to do it now.  I imagine that tool was invented by someone who had to clean out the inside and skip playing basketball with his buddies.  Necessity is the mother of all inventions.

I don’t know if he was paid or not, but there are two types of entrepreneurs when it comes to deciding to pay their kids or not.

• Their kids are slave labor plain and simple. Working for the family business for free is a right of passage.  I can’t agree or disagree with that, but certainly all the hard-manual labor jobs that I was underpaid for kept me in college.
• The business owner pays their kid for doing work.

No matter which camp you may lie you can possibly take advantage of some tax advantages.  What I’m about to tell you has no barring on what I think you should pay your kids or if they should keep this whole amount.  Maybe you want to pay them the amount and have them pay you for rent or something to teach them responsibility.  I know that hard work I was underpaid for made me appreciate other work and the amount I was getting paid.

Here are the numbers.

Under the tax law everyone gets a Standard Deduction of $12,000.  Thus if you pay your kid up to the $12,000 they will not incur any federal tax.

Let’s say you are in the 32% effective tax bracket.  Meaning for every $1 you make you pay .32 of taxes.  On $12,000 you would pay $3,840.  What would your kid pay? $0!

I have a client who has 4 kids.  That is a savings of $15,360.  This is typically one of the few strategies that we help business owner’s decide if it is the right thing for them and their business.  With more and more kids staying at home longer and with college becoming more and more expensive this is one way to lighten the bite.