Put Your Child on the Payroll This Summer
Are you a self-employed business owner and the parent of a teenager? Giving your child a job this summer could be a smart tax move.
Deduction for you. The net income you earn as a self-employed person in 2011 will be taxed at rates as high as 35% (federal), and any state income taxes imposed on your earnings will be an additional burden. By deducting wages paid to your child, you can reduce your self-employment earnings - and your income taxes. The deduction is allowed as long as your child does legitimate work and the wages you pay for the work are reasonable.
Income for your child. The first $5,800 of your child's earnings will not be taxable because the amount can be offset by your child's standard deduction. Any earnings over $5,800 will be taxed at your child's rate, but that will probably be much lower than your marginal rate. In 2011, up to $8,500 of a single person's taxable income is taxed in the lowest 10% bracket.
More tax savings possible. The wages you pay your child are also deductible in computing your net earnings subject to self-employment tax. Until your child turns 18, those wages will be exempt from FICA taxes, assuming your business is unincorporated. So all around, you'll come out ahead .•
Roth IRAs Versus Designated Roth Accounts
Survey says: 33.6% of 401 (k) plans offered designated Roth accounts in 2009.* While designated Roth accounts share certain similarities with Roth IRAs, they also have their differences. Here's a comparison that can help you determine which, if any, type of Roth account may be right for you.
Similarities
Contributions to either type of Roth account are made after tax, and any earnings on your contributions are untaxed while held in the account. Both contributions and earnings can be withdrawn tax free provided you've held the account for at least five tax years and the withdrawals are made on account of your disability, on or after the date you reach age 59V2, or because of your death.
Differences
You can contribute to a designated Roth account offered by your employer's 401(k), 403(b), or 457 governmental plan regardless of your income. To contribute to a Roth IRA in 2011, your modified adjusted gross income can't exceed $122,000 (single), $179,000 (married filing jointly), or $10,000 (married filing separately).
You also can contribute more per year to a designated Roth account. In 2011, the maximum amount that can be contributed to a plan with a designated Roth account is $16,500; $22,000 if you're age 50 or older. (Your plan may impose lower limits.) The limits apply to all plan contributions, pretax and after tax combined. The maximums for a Roth IRA are $5,000 and $6,000 (age 50 or older).
As is the case with most other employer-sponsored plan accounts, you generally must begin taking annual required minimum distributions (RMDs) from your designated Roth account once you reach age 70V2. RMDs are calculated using IRS tables based on life expectancy. Lifetime RMDs aren't mandatory with a Roth IRA .•
* 53rd Annual Survey of Profit Sharing and 401 (k) Plans, Profit Sharing/401(k) Council of America.
100% write-off for heavy SUV's
Under the 2010 Tax Relief Act, a heavy SUV - one weighing over 6,000 pounds - purchased new and placed in service after September 8, 2010, and before January 1,2012, and used only for business purposes, qualifies for a 100% first-year write-off of its purchase price.
New Deductable Medical Expenses.
The IRS recently announced that amounts spent for breast pumps and other supplies that assist lactation qualify as deductible medical expenses. Therefore, these expenses can be reimbursed from a flexible spending account, health savings account, Archer medical savings account, or health reimbursement account.
Change for 529 Plans
Taxpayers who have a 529 college savings plan should be aware that the cost of computers and related technology, along with Internet access, is no longer considered a qualified expense. The only exception is it the college requires a student to have a computer to attend. Othe rvvise, withd ravving money for the purchase can result in taxable income and a 10% penalty.
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.
