Flood: 'Kiddie tax' laws offer potential tax savings
Income shifting is the technique of turning higher-taxed income of parents into lower-taxed income of children.
A business owner can use the strategy of employing their child to accomplish this shift. In 2013, the standard deduction will be $6,100 for individual taxpayers. A dependent child can earn this amount before being subject to federal income tax. This can potentially reduce the income passed along to the parent.
Depending on the tax rate, federal income tax savings could be up to $2,415.60 for a parent in the 39.6 percent bracket. If earnings are higher than $6,100, additional taxes are saved by being taxed at the child’s lower marginal rate of 10 percent for the first $8,925 of additional income vs. the marginal rate of the parent.
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