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"TIP OF THE MONTH"
(October 1995)
Save Income Taxes!
Put Your Junior Programmers to Work on Your Home Computer
As in the past, if the kids use the business computer in your home office to play computer games, you could lose the depreciation deduction on the computer. Worse yet, you could lose the home office deduction, because you would not meet the “exclusive use” test.
But now, in this age of increasing computer literacy, many school-age children know their way around computers as well as, or better than, mom and dad. These little computer whizzes can do much more than play computer games. They can update databases, help mom and dad figure out how to make their e-mail programs work, and even print mail-merged letters for target marketing.
Put them to work on these, or other business related computer projects, as your employee, pay them a reasonable salary (minimum wage is a nice place to start), and turn the tables on the IRS! You can deduct your child’s salary from your own income as a business expense, and keep your depreciation and home office deductions, too. Make sure your child keeps records of the hours they work and the work they did. They can do this right on the computer.
If you are self-employed, your child’s wages may be exempt from FICA and FUTA taxes. And, depending on how much you pay your child, you may not have to withhold income taxes, either.
Your child can earn as much as $3,900 in wages in 1995 without having to file an income tax return, and as much as $5,900 without having to pay income taxes if your child puts $2,000 into an IRA account. If you pay your child more than $5,900, you may still benefit by shifting income from your higher tax bracket into your child’s lower tax bracket.
If your child has unearned income, different rules may apply. Those rules are beyond the scope of this discussion, but you can find information about this in IRS Publication 929.
This discussion is limited to federal income tax consequences. Each state has its own income tax rates and rules. As always, general advice may not apply to your specific situation, and rules change constantly, so you should get a professional opinion before relying on this information.
Read the "Tip of the Month" for September 1995.
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