How to Write Off Your Babies | EREI 345

How to Write Off Your Babies | EREI 345

It’s time that we learned to hack the tax code and keep what is rightfully ours!

Wouldn’t you like to make more money and keep it in the family? You can!

Make the absolute most from your work and family circumstances. Begin to create a stronger estate plan for your families future. Write off your babies! It starts here with outlining a tax strategy that works for you on Tax Hacker Tuesday with Tim Berry!

Begin to create a stronger estate plan for your families future. Write off your babies! It starts here with outlining a tax strategy that works for you on Tax Hacker Tuesday with Tim Berry! Write off the Babies!

What You Will Learn About How to Write Off Your Babies:

  • How to keep from overpaying taxes

  • Preparing assets to be passed along to your children

  • How to prevent the IRS from taking more of your income than required

  • Tax deductions for you and your family that you must not miss on Tax Hacker Tuesday

  • Leveraging the loopholes of the tax code

  • Tax strategies to save you even more on your tax bill

  • Ways to deduct more on your tax return

  • How to make the most out of your work and family situations

  • Create a stronger estate plan

  • Ways to make more money and keep it in the family

  • How to write off your babies

Recommended Resources:

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write off your babies


Speaker 1: This is Theriault Media.

Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest 1%?

Now, you can. Tim Berry, attorney-at-law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday.

Bernie Garland: Mo money, mo money, mo money, mo money.

Tim Berry: Mo money? What’s that mean?

Bernie: How to keep it in the family.

Tim: And how are we gonna do that, Bernie?

Bernie: We’re gonna pay the kids.

Tim: Pay the kids?

Bernie: We are gonna pay the kids and they are gonna have mo money, and a business deduction now.

Tim: Hold up, hold up.

Bernie: I don’t understand this. You tell me how this works.

Tim: Well, I was gonna say, what do we care about the kids having mo money? I want to have mo money. Is this gonna help me have mo money?

Bernie: Duh.

Tim: Okay. Okay.

Bernie: You think for a moment that we would be presenting all this to you out there if it wasn’t gonna benefit you and your children?

Tim: Good point. Good point. So, let’s talk about this. You want to take the bullet and run with it?

Bernie: You want to hire your children.

Tim: Okay.

Bernie: You want to pay them.

Tim: Okay.

Bernie: And, interesting – you can pay them up to $5,950 and not pay any tax on it. You have to hire your children. And they have to be under 18 years of age.

Tim: For this particular idea to work?

Bernie: For this particular idea. But you have another concept.

Tim: Can I stop you there and lets explore this a little bit? Can I hire my kids to go wash my car?

Bernie: Not really. They have to be connected to the business.

Tim: So they gotta provide valid services for the business?

Bernie: Valid service, and who quite frankly there’s a tax court decision that said you can hire a six year old. He was picking up trash in a mobile home park for his mom and dad. The tax court at the IRS challenged it, and the tax court said, “No, no, no. He’s allowed to do that because he’s working for the family and he’s providing a service, and they’re paying him.”

Tim: Got it. So, long short of it, kids have to provide a valid service. So, my kid, for example, he’s probably gonna be editing this video tape. Is that a valid service that he can be paid for, for doing?

Bernie: Absolutely.

Tim: Here’s the other cool thing, too, is as my kid’s editing this video tape he’s learning how to edit video, which is a major component going forward in the future of internet and everything. So not only am I getting money down to him in a tax-free manner, that first $5,950’s not going to be subject to taxes, but he’s also learning a fantastic trade or skill.

By the way, that other component you wanted me to talk about?

Bernie: Yes.

Tim: The 401k.

Bernie: Yes.

Tim: If the family has a 401k now, Junior can go from making $5,950 completely tax free in a given year, but now he can put in up to $17,000 into a 401k. So, $17,000 plus – let’s call it $6,000. That’s $23,000 a year Junior potentially could be earning. Have to provide valid services, and has to be… I don’t know, want to call it valid to be paid. But you can’t overpay him. Everything has to be on the above board. These are going to be heavily scrutinized by the IRS. But, so long as the kid is providing valid services, you’re providing a reasonable amount of pay, it’s gonna work.

By the way, this $23,000, that’s a tax deduction for your business. That is a tax deduction for your business, and it lowers your taxable income, and I’m gonna sling it right on back to you, Bernie. What happens whenever you lower your taxable income?

Bernie: Well, when you lower your taxable income, you pay less taxes.

Tim: You pay less taxes.

Bernie: Did I do it right?

Tim: You did absolutely wonderful.

Bernie: Thank you.

Tim: But the great part, too, is as we lower your taxable income, like what we were talking about earlier, the phase outs.

Bernie: Yes.

Tim: Many things in the tax code depend upon what your adjusted gross income is. Whenever you start getting up in the… Above the 100s, your ability to take certain tax credits and certain tax deductions starts plummeting. But now, if we start splitting the income of the family business from you and over to the kids, now there’s a good chance that we’re not gonna be hitting those phase outs if we do things correctly. That could be massively beneficial. That could be saving you thousands of dollars just by avoiding the phase outs.

Bernie: Well, you know, it’s an interesting factor here. We’re talking about $17,000 to put into a 401k, and also the $5,950 at this time being non-taxable to the children, and a business deduction for the parents. Obviously, a six year old is not going to contribute $15,000 worth of work.

Tim: Obviously.

Bernie: But remember something – that six year old becomes nine years old, becomes 13 years old, becomes 15 years old, becomes 16 years old, becomes 17 years of age, and you can really get these people involved in your business. By the way, the labor laws don’t apply.

Tim: Child labor laws? In most states, the child labor laws are not going to apply if they’re working for mom and dad. By the way, key point you bring that up, they have to be working for mom and dad for this to apply.

Bernie: There’s a couple of entities that allow you to do this if you want to elaborate on that.

Tim: The LLC, so long as the LLC’s owned 100% by Mom and Dad, we’re good. Can it be an S Corporation? No, doesn’t work ’cause a corporation’s a separate legal entity. Can it be a C Corporation? No, won’t work ’cause that’s a separate legal entity.

You know, there was another key point that I know I wanted to bring up, Bernie. But I can’t think of it. I’m having a teenage moment right now. Were there others… Any other major key points we wanted to bring up on this?

Bernie: Well, I think the idea of having mom and… By the way, the interesting thing about this is that on our workshops and seminars how many times have we brought this up, which is acceptable by not only the IRS but tax court? The courts have already decided that children can work for their parents in their businesses, and everything that we outline to you is completely accurate. But, holy cow, there is so many people that sit in there and say, “I didn’t know that. My tax preparer never told me about it.” You know, I’m sitting there and saying, “Your tax preparer, you need to question a tax preparer and say, “I have this business, can I legally hire my children and contribute to the 401k?” and outline exactly what Tim and Bernie said. The answer is yes, you can.

Tim: Absolutely. And, you know, the point I was gonna bring up before. I was gonna give an example and then bring up another issue. That’s why I wrote that down real fast. We had a client just recently. His wife had a Schedule C, she had her own business. Junior wanted one of these fancy-dancy Xboxs. Now, here’s what they did. Junior comes into the wife’s business about 20 hours a week. He actually comes in after high school and he works there for about 20 hours being a receptionist, stuff like that. They pay him $10 an hour. That’s $200 a week. $200 a week.

Let’s say he works 50 weeks. That’s $10,000 they’re able to move over to Junior. Now, whenever Junior wants to buy his fancy-dancy Xbox, he uses his earnings. Mom and dad paid for that Xbox, effectively, with pre-tax dollars. Now, whenever he wants the fancy-dancy games, they use pre-tax dollars. Now, whenever he wants to start taking karate lessons, pre-tax dollars. If he wants to take gymnastics dancing lessons, or a female, a girl, use pre-tax dollars. Then, with the excess money over and above that, we put it inside the 401k, the family’s business gets a tax deduction. The kid doesn’t have to pay taxes, and now we’re saving for college in a tax-deferred manor. It’s a no-brainer.

Now, the key point I wanted to bring up. Some people are gonna say, “Well, Tim, this doesn’t work. What about the kiddie tax?” Well, here’s the thing. The thing called the kiddie tax is where the kid’s income is taxed to the parent’s tax brackets. But that only applies for the kid’s unearned income – the kid’s investment income. This is earned income, and so, therefore, this is not taxed at the parent’s brackets. So long as the kid is under 18 and employed by mom and dad, there is no employment taxes on this either. It’s just a fantastic, wonderful way to dramatically lower your taxable income.

Bernie: Yeah. I have to point out that I have been through audits where the audit… The IRS was questioning this. I passed every audit that I had on it because there are publications that the IRS puts out on how to accomplish this. A Circular E tells you how to accomplish this.

But here’s the key – everything that we’ve outlined to you, you can do. But, if you get scrutinized, you need to do the following: Make sure that you’re issuing your child a check each week. Have it deposited in a bank account that maybe you’re a co-signer on, but it’s under the child’s name also. Issue a W-2 at the end of year for the amount of money that you paid and keep time records. If you do that, then you are complying with the requirements that the tax court and IRS are saying, “Okay. So, number one, we know that you are allowed to hire your children. You’re keeping the records appropriately. You pass muster.” You know, God bless.

Tim: So it comes down to, they provide valid services, pay them a reasonable salary, you make sure you document things ’cause they’re heavily scrutinized by the IRS. But at the end of the day, it means what?

Bernie: It means that you can have an estate plan for your child with present day tax-free money.

Tim: Actually, that was more highfalutin than I wanted. I want to go back to the beginning, Bernie. It means what?

Bernie: It means mo money, mo money, mo money – keep it in the family.

Speaker 1: That’s it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday.

Matt Theriault

Real estate investor and educator.