Kids and IRAs--yet again

[Martha]

I have been gone for a few days, attending a legal education seminar on individual income taxes. (Short of necessary legal education credits and packing them in for the year). The speaker was a CPA by the name of Sharon Scott. She frequently gives tax seminars to CPAs and lawyers.

She spent some time talking about establishing IRAs for kids. She pushes the limits far more than anything we talked about in our prior discussions. http://early-retirement.org/forums/i...p?topic=2966.0

She said that several years ago she hired her one year old grandson to pose with her on her Christmas card. She paid him a couple thousand bucks-- which she put into an IRA for him. She paid enough extra to cover the necessary self employment tax for her grandson. (He was not hired by his parents so for sure self employment tax was due). Because this was not a business expense on her part, she took no deduction.

She was audited by social security. Their concern was that she was making up income. She proved she paid him the money and audit was over.

Interesting stuff. She said she recommends to her clients that they hire their kids as independent contractors to mow the lawn, etc. and then contribute to an IRA. The amount paid is kept to less than what is necessary for the kid to have to pay income taxes and she claims no self employment tax is due if the parent hires the kid.

I'm not sure I agree with all of her analysis, but it sure was interesting.

[Nords]

Thanks for keeping these tax questions in mind, Martha. This must be like George Carlin saving all his weird religion questions for the catechism priest.

Originally Posted by Martha

She was audited by social security.* Their concern was that she was making up income.* She proved she paid him the money and audit was over.*

I bet there's a permanent flag on her file with both SS and IRS.

The problem isn't so much what the rules say as what the IRS thinks. I can figure out the former-- eventually-- but I can't afford the latter.

[MRGALT2U]

Originally Posted by Martha

She said that several years ago she hired her one year old grandson to pose with her on her Christmas card.* She paid him a couple thousand bucks-- which she put into an IRA for him.* She paid enough extra to cover the necessary self employment tax for her grandson. (He was not hired by his parents so for sure self employment tax was due).* Because this was not a business expense on her part, she took no deduction.*

*

She should have used the kid for her "business" Christmas card.
Then, it would still have worked and she would have the deduction.
No one would know if she used a few cards on her "friends".
Besides, she is a CPA. Every warm body is a potential client.

JG

[LOL!]

"... her Christmas card."

It must've been her business Christmas card. This is no different than all the local car dealers and furniture store owners from having their kids in their TV commercials and print ads. It is also noteworthy that it appears that she did not do this every year thereafter. The audit was probably triggered because she didn't take it as a business expense.

Or should I pay my kids for our family Christmas photo? Wait a minute ... my kids should be paying me!

[Martha]

Originally Posted by LOL!

"... her Christmas card."

It must've been her business Christmas card. This is no different than all the local car dealers and furniture store owners from having their kids in their TV commercials and print ads. It is also noteworthy that it appears that she did not do this every year thereafter. The audit was probably triggered because she didn't take it as a business expense.

Or should I pay my kids for our family Christmas photo? Wait a minute ... my kids should be paying me!

No, it was her personal Christmas card. And she did do variations each year since, though now it is her daughter that is hiring her son to mow the lawn.

Basically, her position was that it is ok to fund an IRA by hiring your kids or grandkids as independent contractors to do household related things, like chores, even if you do not have a business. As I said above, I am not sure I agree with her analysis.

I had considered helping with IRA stuff for my daughter. She had earned income that she needed for other things, so I planned to help her contribute to her IRA when she turned 18.

The idea is attractive because of the long time period for compounding. We all know how a tiny bit of money, compounding tax-free in a high risk/high yield fund for 35 years can give spectacular results. Who can resist. Gimme summa dat!

But then I said -- wait a second, this is silly. I shouldn't be funding her retirement. I should let her run her own life. She's going to do fine financially. Her retirement is not my business.

[Martha]

Al, your message reminded me of what grandparents and some parents used to do, before IRAs. They would buy the kid a whole life insurance policy for a small amount of money.

Then the kid would cash the policy in when they got old enough or take a loan against it. Not sure that is what Grandpa contemplated.

But for IRAs, just think about the power of compounding. The $2000 contributed when the kid was a year old could be a million bucks when he retires. (But don't forget the power of inflation).

[retire@40]

Originally Posted by Martha

No, it was her personal Christmas card.* And she did do variations each year since, though now it is her daughter that is hiring her son to mow the lawn.*

Basically, her position was that it is ok to fund an IRA by hiring your kids or grandkids as independent contractors to do household related things, like chores, even if you do not have a business.* As I said above, I am not sure I agree with her analysis.

If the kid paid self-employment tax on that income and the payer took no deduction for that payment, why would the IRS say no to that?* Of course they would allow that.* It's free money to the government that would otherwise have been construed as a non-taxable gift.* The US government hates gifting.

I also agree with you in that I also don't agree with the analysis put forth in the 2nd paragraph.

[Martha]

Retire@40, I thought this thread would get your attention. * I actually thought of you and our previous discussions ( ) when the speaker was talking about*this issue.*

[retire@40]

Originally Posted by Martha

Retire@40, I thought this thread would get your attention. * I actually thought of you and our previous discussions ( ) when the speaker was talking about*this issue.

Good, that's explains the four hour ear-burning sensation I had that day.