Parents: Skip the Allowance and Employ Your Kids

Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Have kids going to college in a few years?

Here are some simple steps to begin your journey.

If you already plan on your kids going to college, it's never too late to start planning effective and efficient ways to increase savings, lower your taxes and improve your odds for receiving student financial aid.

Let's say you already give your children an allowance. You're already paying out of pocket and not getting any tax benefit. With a few changes you can turn that cash outflow into a tax deductible expense that can even help your kids save for college.

Consider hiring them to work in your business or on the rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or property.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of "earned" income below certain limits, you won't be at risk of paying any "kiddie" tax either. ("Kiddie" tax limits adjust for inflation each year).

In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the added benefit of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at least five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the critical number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and type of parental assets as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to improve your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental property income, you may be able to lower your EFC and improve the amount of aid your child receives.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER (tm) Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.