Income Shifting Defined: SAVE Thousands in Taxes
Want to save money in taxes WITHOUT working harder?
Income shifting is defined as the transfer of money within a business or between family members with the purpose of decreasing tax liability or AGI. This isn't a new concept and it is a completely legal method for lowering your tax burden, if done correctly.
Shifting income from a higher bracket taxpayer to a lower one or even a zero rate-bracket is one way to save during tax time. Typically, splitting the income between family members will save you thousands in taxes. One method is by hiring family members to work in the business. Another idea, is you can legitimately shift income to your kids.
Let me give you an example of how this can work.
Jane owned a consulting business.
She had two teenage sons that legitimately did work for the business.
Some of the tasks they did included vacuuming the offices, emptying trash cans weekly, taking care of recycle and shredding documents, filing receipts, stuffing envelopes and doing yard work outside of the office. Jane plans to pay her sons $5,000 each for the year. She was able to shift $10,000 from her high tax rate of 38% to her son's ZERO tax rate. This is a $3,800 tax savings. She plans to use this $10,000 to teach her kids about budgeting. Also, this income shift helped her personal cash flow because she has the kids help pay for groceries and set aside the money for college. Another thing Jane plans to do is put money aside in a Roth IRA for the kids. What a GREAT tax deduction for her business - and it was EASY!
While the company will need to pay some payroll taxes, the savings far outweigh the cost.
Here are some facts and tips
around income shifting:
- Your kids can be any age
- They need to keep a time card for work done - documentation is KEY
- The work needs to be appropriate for the age and skill level
- Depending on the situation, your child may not have to file a tax return
- Consider helping parents or grandchildren who might be in lower income tax brackets
Depending on your business entity, you can also reduce self-employment taxes with this strategy. For corporations, it is a great way to reduce the taxable income. If you are a sole proprietor, there are some taxes the kids don't have to pay in their paycheck. And, the IRS allows this, but they don't volunteer the information to you.
Don't get this strategy confused with gifting money to your child. When gifting, there is no work involved. Also, don't get this shifting of income mixed up when parents move investment income (interest, dividends and capital gains) to their children.
That is called the "kiddie tax."
Income shifting works well under specific situations and not everyone can meet the requirements. Depending on your situation, you may be able to take advantage of the income shifting opportunity, but make sure you talk with someone who knows the rules so you can play the income shifting tax game correctly.
