IRS REWARDS YOU FOR TRAINING YOUR CHILDREN
Do You Use an Overlooked Tax Deduction Available To All Landlords?Many of us get interested in real estate after we have children. However, not enough of us take advantage of using our dependents to lower our taxable real estate income. Since I don’t want to get into trouble by offering tax advice, let me just recount my story and drop some overt hints. But first let me give credit to Al Aiello, CPA, MS Taxation for opening my eyes. He is also the author of Millionaire Tax Strategies for Real Estate Investors. I met him at Jeffrey Taylor’s 2014 Mr. Landlord Convention in Nashville, TN (which was an awesome event).
Check Out IRS Publication 929. I want to direct your attention to what the IRS says about “earned income” for your children. There is a table included that specifies that your dependent can earn up to $6,100 without having to pay/file taxes. That’s the 2014 limit which tends to go up each year.
I’m a big time believer in teaching my children about financial literacy and teaching them how to run our landlording business. So I was excited to learn that the IRS indirectly rewards you for training your children. Let me show you how on-the-job training creates tax deductions for landlords.
Instead of giving my 11 year old daughter an allowance, I’ve hired her to work for our rental business. Her duties for the month include: Proof Reading, Lite Landscaping, Office Cleaning, Video Editing, Research, Filing, Assist with tenant turnover and Litter pick up. A total of 35 hours per month.
For 2014, we’re paying her $14/hour so she racks up $490/month ($5,880 per year). HINT: You can always pay your child to be a model in your advertisements. I’m sure they are just as adorable as any professional model. Okay, so we’re paying her less than the $6,100 limit and we are in compliance with IRS guidelines.
I’ve opened a checking account for my daughter with my wife and I as joint owners, and each month we transfer her payments into it. I suggest being formal about the paper trail. Then we use the money from her account to pay for her expenses (just like normal) and contribute to her college savings (just like normal). Please read that last sentence a few times. Let it sink in.
At the end of the year, my LLC will report a $5,880 tax deductible expense for “Administrative Services” and according to the publication, my daughter won’t need to file at all. This deduction flows to my 1040. Assuming I’m in the 30% tax bracket, this strategy leads to a $1,764 tax offset. Check with your tax preparer to see if you can do something similar. Don’t be afraid to read and use the tax code.
The IRS allows you to correct your last three years of tax returns, so I tried to amend my return from three years ago. I wasn’t paying my 11 year old as much back then, but I figured I was due a $200 refund. I was paying her out of my business account, so I sent the IRS proof and they agreed. Today I received my first overpayment refund. Now I plan to go after refunds from the past two years.
Some Warnings1 – Don’t lose your morals. There are plenty of legitimate ways to use this tactic. Be ethically creative.2 – This expense might negatively affect your commercial property’s appraised value.3 – If you completely shelter your income with this strategy you may draw unwanted attention.4 – Make sure your documentation is thorough; don’t be lazy.Now that you know, what will you do with this information?
This last series of tax tips are by Al Williamson, adapted from strategies by Al Aiello, both who are featured authors at LandlordBooks.com.The above tips are shared by regular contributors to the popular MrLandlord.com Q&A forum, by real estate authors and by Jeffrey Taylor, [email protected] To receive a free sample of Mr. Landlord newsletter, call 1-800-950-2250 or visit their informative Q&A Forum at LandlordingAdvice.com, where you can ask landlording questions and seek the advice of other rental owners 24 hours a day.