This is a series about the 5 Most Expensive Tax Mistakes That Traders Make. Many people do not think of stock investing and stock trading as a business. But if you make a decent income from stocks, options, futures, forex, bonds, or commodities, consider the extra benefits setting up a small trading business would provide.
Mistake #2. Why Are You Not Hiring Your Kids
We are always amazed at how many profitable traders do not take advantage of this tax saving strategy. Think of all of the things you spend money on for your kids during the year: books, computers, video games, sports, etc. Wouldn’t it be great to pay for those things with pre-tax dollars?
Did you know that your children as young as age 7 can work for you? That has been upheld in the tax courts. And here is the best part….if you pay them under $5950 (the standard deduction for 2012), they won’t pay any income tax even if you claim them as your dependent!
Let’s look at an example: you hire your 12 year old to clean your office every week. If you paid them $100 a week or $5200 for the year, they pay $0 income taxes on that money. If you are in the 33% tax bracket, you’ve saved over $1700 in taxes. And your kid can now spend their own money on the expenses you would have incurred any way...INCOME TAX FREE!
No “red flags”, no “gray areas”, and no “aggressive” strategies.
But there are rules you must follow. For instance, your kid must be a real employee and the compensation you pay them must be reasonable for the job they are performing for you. You must also comply with all legal requirements such as filing IRS tax Forms 941 quarterly and Form 940 annually.
Trader Tax Coach can help you determine how much to pay your child, how to document it, and we can even file the quarterly 941 tax forms and annual 940 tax form.
Part 1. The Wrong Business Structure.
Part 3. Missing Health Care Strategies.
Part 4. Wrong Home Office Deduction.
Part 5. Mark to Market Election.