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Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:33 AM   #61
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Re: Opening a kid's Roth IRA

Yes, definitely, through a business, or as their own business. Have at least a semblance of legitimacy-Martha I think your example is correct, too, but didn't ask Dad specifically. But even if you don't, you probably won't get caught. He put it like this, medium reward, small risk, huge penalty if you do get caught. Is it worth the risk? (we put aside ethical judgements even though we both had opinions in that realm).
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Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:38 AM   #62
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
This is diverting from the original issue of W-2 for chores and has totally different tax ramifications, but yes, because the child is self-employed in the business of mowing lawns.
Since we are arguing here, the original question wasn't about W-2s for chores, but about Roth IRAs.

But it is important to know that you do have to do an analysis to figure out whether the child is self employed in her business or whether the child is getting a wage and is an employee because totally different reporting is required as you well know.
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Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:51 AM   #63
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Martha
Since we are arguing here, the original question wasn't about W-2s for chores, but about Roth IRAs.
Correct.* Talking about this for a few days just made it feel that way.

Roth IRAs are allowed to anyone that qualifies from birth to death.* There is no age qualification.
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Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:58 AM   #64
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
Payment for household chores is NOT earned income for your child!
Geez, go surfing for a day and see what happens! *I'm glad I wasn't sitting around watching the blow-by-blow.

Hey, Retire@40, maybe if you use more capital letters I'll understand more quickly. *If we were sitting in the same room, would I understand this better if you spoke slowly in a loud voice? *If you can't provide a reference or a ruling or even an IRS letter, then kindly refrain from lecturing us about IRS policy. *My opinions are based on all the IRS pub reading I've done over the last few months, conversations with a CPA who's spent tons of quality time with the IRS' revenue officers, and the half-dozen magazine articles that pointed me to the issues. *So far your reference appears to be a CAPS LOCK key.

I think what we have here is a difference of opinion. *Luckily the only opinion here that counts is the IRS', not yours and certainly not mine. *While the IRS would probably not look kindly on my paying our kid to make her bed, it's not unreasonable to pay a kid to do the household jobs that I'd pay the neighbor's kid to accomplish. *And if no one's filing a W-2 on the neighbor's kid then I doubt that I'd file one on my kid-- I favor the concept of personal pay records & timesheets. *(Gee, TH, I wonder if Quicken supports this.) *And I can certainly put rental-property chores on Schedule E and back it up with a W-2.

Quote:
Originally Posted by retire@40
This is diverting from the original issue of W-2 for chores and has totally different tax ramifications, but yes, because the child is self-employed in the business of mowing lawns. *The child may file a Schedule C and report all income and related expenses. *But the child will be subject to federal, state, and self-employment taxes. *Whatever is left over may be contributed to a Roth IRA up to $4K.
What I've read is that kids under 18 in the family business aren't subject to withholding for federal & self-employment taxes, and they usually have a big enough deduction ($4850 off the top of my head) to not pay any taxes. *

I'm still trying to get Hawaii's ^%$# tax website to download their pubs. *I think they turn the server off for the weekends to keep taxpayers from being able to research tax-avoidance schemes...

In any case rush hour will be over in another 90 minutes. *Still 3-5 feet on the south shore, and 8-footers predicted for Friday! *Happy Kamehameha Day!
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Re: Opening a kid's Roth IRA
Old 06-06-2005, 11:09 AM   #65
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Nords
My opinions are based on all the IRS pub reading I've done over the last few months, conversations with a CPA who's spent tons of quality time with the IRS' revenue officers, and the half-dozen magazine articles that pointed me to the issues.
Funny how two people using the same sources can have differing conclusions.

By the way, sometimes I write slowly because I know some people can't read fast.
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Re: Opening a kid's Roth IRA
Old 06-06-2005, 11:17 AM   #66
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
Funny how two people using the same sources can have differing conclusions.
A famous Navy cartoon says it this way--
A study of the differences between the Navy's warfare communities:
Nuclear submariners: "Don't do it unless the book says you can do it."
Surface warfare: "It's OK to do it unless the book says you can't."
Aviation: "Contrition is easier than permission!"

After years in the first category, I'm gonna let my hair down and go with the middle option. I think there's plenty of wiggle room for everyone to feel that their position is supported by the laws & references...
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Re: Opening a kid's Roth IRA
Old 06-06-2005, 11:33 AM   #67
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Re: Opening a kid's Roth IRA

Nords, besides the compensation issue we have beat to death, think through these things:

---if you end up considering your child as self employed, she likely will have to pay the self employment tax

---as you noted above, if your child's earned income is below $4850, she doesnt have to file income taxreturns. However, don't forget unearned income which will require filing of a return at a much lower level of income and may goof up any exemption from withholding. And so retire@40 doesn't get on my case, withholding applies only if child treated as an employee.

---if you treat your child as an employee, as you indicated, the IRS has said children employed in a family business which is not a corporation do not have to have FICA and FUTA withheld. One issue we haven't talked about is whether this same exception applies if the child is employed as an employee to do work around the house, rather than employed in a business.

Gotta go to the big city for a closing.
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Re: Opening a kid's Roth IRA
Old 06-06-2005, 12:20 PM   #68
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
Funny how two people using the same sources can have differing conclusions.
But you havent offered any sources.
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Complification
Old 06-06-2005, 05:26 PM   #69
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Complification

The surf was awesome.* It's been a while since I had the longboard try to race away from me while I was popping up.* I figured it out when I looked over my shoulder to see that the "little" wave had blown up to an eight-footer and was curling down over my head.* So I ran away fast...

You've raised some very good issues, Martha.* The key is how each one of those is addressed without triggering some other form of taxation or inquiry.

As I feared, the state taxes are way more complicated than the federal rules.* I just pulled up the Hawaii employer's tax guide.* (Funny how that PDF wouldn't come up all weekend but it popped up in a microsecond during business hours.)* Anyway Hawaii withholds at least 1.4% of anything that would give them more than a dollar and teenagers can't claim many exemptions.* So first I'd have to file form HW-4 and then I'd have to follow that up with $92 of withholding payments on $4000 of wages.*

TurboTax says zero federal taxes when I run through $4000 wages and ~$500 of UTMA investment income.* (Tweedy, Browne is pretty tax-efficient.)* However we'd be paying $33 state tax and thus claiming a $59 refund.

As disappointed as I am in the People's Democratic Republic of Aloha, at first glance the $33 seems like a pretty reasonable price to pay to kick off tax-free compounding.* However even a 10% return that first year would cost $33/$400=8.25%.* (Of course I'm mixing wage taxes with investment income but the point is that this whole avoidance maneuver could be viewed as having an annual 8.25% load.)

Back to the drawing board, but despite the taxes it's probably worth keeping our eyes focused on the power of the extra years of tax-free compounding.*

I wonder if all this Hawaii paperwork & taxes would catch their auditor's attention, or cause the IRS' local office to get curious.*

Glad I didn't start asking myself these questions in November...
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Re: Complification
Old 06-06-2005, 08:20 PM   #70
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Re: Complification

Quote:
Originally Posted by Nords
TurboTax says zero federal taxes when I run through $4000 wages and ~$500 of UTMA investment income.* (Tweedy, Browne is pretty tax-efficient.)* However we'd be paying $33 state tax...
How can the federal tax be zero?* In this case, isn't it $25 (10% of the UTMA income over $250?)*
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Re: Complification
Old 06-06-2005, 08:40 PM   #71
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Re: Complification

Quote:
Originally Posted by retire@40
How can the federal tax be zero?* In this case, isn't it $25 (10% of the UTMA income over $250?)*
Dude, it's zero.* Gimme a break for not regurgitating every little stinkin' detail of the tax-estimation process.** While I am seeking ruthless criticism of a bleeding-edge tax question, I'm not trying to baffle anyone with my brilliance.

I don't know where you're getting your numbers from but when I say "~$500 of UTMA investment income" I mean that her UTMA shares of Tweedy, Browne Global Value threw off $515 of dividend income and paid some foreign taxes.* And I ran this mockup on TT for 2004 returns so if there's a tax law that affects 2005 UTMA income then I haven't learned it yet.

*(But gosh, I'll rectify that oversight now.* Let me read 2004's numbers off the hypothetical 1040:* $4000 in wages, $1 of checking-account interest, $515 of investment income from Schedule B, $4250 standard deduction (which I believe has been raised to $4850 for the 2005 tax year), leaving $266 taxable income.* The resulting tax of $13 is wiped out by a $13 foreign tax credit from TBGVX's 1099.)

Martha's point is well made that, even if the 2005 deduction rises to $4850, the $4000 of income can quickly push a tax bill from zero to positive numbers.* If that combined federal/state tax bill gets over, say, $50 then it makes me question the wisdom of paying up front to compound tax-free.* But that's just another spreadsheet that I haven't gotten around to plugging the numbers into-- although I suspect tax-free compounding will reign supreme in the end.* I'm just not sure how much hassle factor I care to endure with the paperwork, the tax bill, and perhaps a query or two from the tax authorities.

In any case I think I'm beginning to see the answers to my original questions:* "Is this deal too good to be true?* What am I missing?"* Yikes.* But at least I won't lay awake nights wondering about it...
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