2 Simple Ways Parents Can Reduce Their Tax Bill
When our first little bundle of joy came into this world, I was worried about how to afford everything. The idea that he, and his subsequent siblings would some day reduce our tax burden never even crossed my mind. Here are just TWO of the simple ways that parents can reduce their tax bill.
Gifting annually to plan for the future
You AND Your Spouse can gift each of your children up to $16,000 (in 2022).
This is not a tax deduction, meaning it isn’t going to reduce your taxable income. However, this is a tax-free way to build up an investment account for each of your children over the years. So when they are ready to buy their first investment property, they have an amazing, tax-free head start.
Scenario
I will use my family dynamic as the example. I am married and currently have 3 children ages 13, 10 and 6.
Let’s say I would like to gift them the maximum amount allowed every year until they are 18 years old. (At which point I will highly encourage them to purchase a 4-plex to live in and collect rent on the 3 additional units).
Xander: 18-13 = 5 years of savings.
$32,000*5 = $160,000 tax-free cash to put toward his first home and investment.
Westyn: 18-10 = 8 years of savings
$32,000*8 = $256,000 tax-free cash to put toward her first home and investment.
Sloan: 18-6 = 12 years of savings
$32,000*12 = $384,000 tax-free cash to put toward her first home and investment.
For our family’s financial strategic planning, this money would not sit idle in the meantime. They would earn more interest than a savings account, add to their own net worth AND be able to use It like cash, but it will continue to earn interest! And the entire amount will have tax-preferred treatment with no fear of losing money to the stock market (This is guaranteed not to lose value).
2. Pay Your Children; Whether You Own a Business or Not
you can actually reduce your taxable income by shifting wages to your children. Then have them pay for their own expenses like sports, phones, clothing, gas, insurance, etc.
Here are some general rules that you should follow:
Children have to be doing work for you. This can be modeling (for young ones) or mowing the lawn at a rental property. We have a full list of ideas in this downloadable white paper.
Pay your children in a way that makes sense for their age and the tasks they are doing.
Record their hours and preferably what they were doing in case of an audit.
You cannot pay them an inflated rate. You must pay them a similar rate to what you would pay a third-party to perform similar tasks.
You don’t currently have to have a business in order to pay your children. You can set up a family business that is a sole proprietor and utilize this strategy.
