Category: tax deductions

The child tax deduction laws can be used to reduce your tax bill by “employing” your kids in your business. Kids here refer to minors between 7 to 17 years of age. Hiring your children not only makes them smarter, but also saves you a lot of tax money!

As a rule, every child has a standard deduction of $4,570; thus it follows that children are exempted from paying the first $4,570 in income. Now, a child hired in your business is paid the amount, which is deducted from your business accounts. The amount can be spent by the child (or by you), and the icing on the cake is that you save $1,425 in taxes (if you are in the 30% tax bracket)

Interestingly, you are cleared from paying social security tax on the “wages” that you pay the child if your child is a minor and if you reimburse them out of a sole proprietorship or partnership. Social security taxes are levied if, and only if, the wages come out of a corporation.

You do have to do some paperwork to avail this benefit. Form 941 is to be submitted four times in a year. This is basically a form used to withhold finances generated by an employee; however, for a child there will be no withholding. Further, at the end of the year, you will have to issue a W-2.

If the dependent meets all these rules, then all you need to do is furnish the dependent’s social security number, and you are qualified for another exemption.

Tax Credits: In addition to the personal dependency exemption, there are certain tax credits that may apply to you after your children are born. For instance, you are entitled to Child Tax Credit and Child and Dependent Care Credit. Tax credits are a real advantage because they literally cut the amount of tax you pay on a dollar-for-dollar basis. In cases where the child is adopted, it is even possible for the foster parents to assert tax credits on their income tax for legal adoption expenditure.

Income shifting: Since children fall in a lower tax bracket, it is also possible to save on tax money by transferring funds from the parents to the children. However, care should be taken while doing this. For instance, putting a grown-up’s investment in a child’s name is not permissible.