How Your Teen Can Take Advantage of the Tax Code

15 - How Your Teen Can Take Advantage of the Tax Code I cannot tell you how many times I’ve been asked this question: “Josh, my 16 year old son has a part time job this summer. Can he open a Roth?” Yes, he can start a Roth and certainly should. A great strategy is to give him the money to open the account based on the income he made.  Incentivize your children to work by opening a Roth for them For instance, say he made $5,000 washing dishes over the summer but he wants to spend some of that money. Can’t blame him.  That’s why he worked, to get some spending money.  A way to reward him without just handing him over cash is to say, “I’m proud of you getting this job, son. Look at all your peers just lounging around. For your efforts, I’m going to put the amount you made as income into a Roth IRA in your name.” And you then send a check for $5,000 to his Roth IRA provider. Maybe that’s too much of a gift for him and doesn’t incentivize him to save any of his own money?  Then simply match the money he puts into his Roth with your own contribution.   Match what your kid contributes to a Roth Say he made $5,000 but only wants to put $2,500 in the Roth. Tell him you will match his contributions dollar for dollar up to his income limits. In this case, he gets $2,500 of his own money to spend as he likes, he contributes $2,500 to his Roth and you match it. Now he has $5,000 in his Roth and $2,500 to spend.  Not a bad deal in the least.   By the way, there is absolutely nothing wrong with doing this from the IRS perspective.  Your son made $5,000 as earned income. As long as no more than $5,000 goes into his Roth he’s good to go.  Your $2,500 contribution is not a taxable event either. No gift tax to pay, no transfer tax, no income tax or anything. Easy as pie, nothing to report. Hopefully, your son will continue to do this each year so by the time he graduates college he’ll have a nice sum of money saved up in his Roth. Have Your Working Children File a Tax Return! The standard deduction of $12k(for those under the age of 65) is much higher than most kids’ earnings.  So, no tax is owed. But have him file a tax return anyway because his employer most likely withheld income tax from his paycheck. As long as his standard deduction is higher than his taxable income he will get the income tax that was withheld returned.  He will not get back this FICA taxes, mind you. But there are benefits to his reporting income even if it is only $5,000 each year from a Social Security/Medicare perspective.  Every $1,375 your child earns is 1 quarter earned towards the 40 they need for full benefits when he retires.  Yeah, this may not seem like much now but it could prove huge in the future. (I’ve done a ton of videos on this topic on my Youtube channel. www.youtube.com/heritagewealthplanning).  What if all he did was mow lawns and had no actual paycheck? He can STILL open a Roth, as long as he reports his income on a 1099.  You’re going to want to research this a bit to make sure he pays his FICA taxes. It’s really not that hard.  Just a couple simple forms and VOILA! He can contribute to his Roth.  How about my daughter who babysits? She will have the exact same scenario as the son who mows lawns.  I’m a dentist can I hire my kids to sit in the chair for a marketing picture? Yes, you can… but, I do urge caution here.  Is it truly earned income when your kids are just being used for a marketing piece? That’s a tough one. However, if you validate they are cleaning up ar