Do you give your kids an allowance? - Page 2

[velochic]

Originally Posted by Leersia

Yeah, that's absolutely right, your kids need to have "earned income". However, the IRS does not provide a very clear definition of earned income. Most experts agree that money that your kids earn babysitting and mowing lawns for other people is "earned income". But, can you pay your kids to do household chores, document it, and call it earned income? Some (not most) tax professionals say that this is a gray area with the IRS and that until they clearly exclude it, it is allowed. There is plenty of information on the internet for people who want to read up on the debate and decide for themselves whether it is worth it (depending on how much your kids "earn", they could have to file a tax return). Just do a search on "Roth IRA" and "kids". Some brokerage firms allow you to set up custodial Roth IRAs for minors with only $100 to start (Schwab).

Well the definition of earned income is "work in exchange for pay". The definition is VERY clear... and the IRS *will* expect precise documentation, especially if they don't earn the $3K minimum to file a return. An allowance for housework? Nope... no tax professional worth their salt would say that's a "gray" area to try to sneak through. Seasonal work? Sure, but you'd better have other customers. Babysitting, sure. But we're talking about this in Childhood Years, not Teens. I can't imagine anything a 7 or 8 year old could be doing (other than something like modeling or acting or some such job) that they would actually be earning documentable income.

[Leersia]

Velochic,
I used this article as a jumping off point, and when I looked into it further, I thought it was a gray area. But I'm sure that you know WAY more about this subject than I do, and I don't mean that in a sarcastic way .

http://moneycentral.msn.com/content/...ips/p33215.asp

If you have a financial background and feel qualified to comment on the veracity of the article, I'd like to hear what you have to say, as I don't want to get crosswise with the IRS over a little IRA.

[lonegirl]

Not out and out....but will when older. He does make money when he helps us at the office though. So when hubby hands out the cash he always give DS $5-10 as well for the hard work he did. He can use the money for what he wants (usually Itouch games)

[velochic]

Originally Posted by Leersia

Velochic,
I used this article as a jumping off point, and when I looked into it further, I thought it was a gray area. But I'm sure that you know WAY more about this subject than I do, and I don't mean that in a sarcastic way .

http://moneycentral.msn.com/content/...ips/p33215.asp

If you have a financial background and feel qualified to comment on the veracity of the article, I'd like to hear what you have to say, as I don't want to get crosswise with the IRS over a little IRA.

My financial background is not formal, but I'll still comment. I've simply been handling my/our investments for decades and read financial books all the time. Finances is a hobby of mine, you could say.

Looking at what this guy is saying, my guess is that the article must be at least 5 or 6 years old. Because there *have* been rulings against parents hiring their children to clean their rooms in recent years.

About 60% of our net worth is in taxable investments. When I talked to my cousin, who is a tax attorney (and dd's godmother) about ways to move some money to a tax shelter investment, this came up. She advised against it, as we don't own a business, which she said is a pretty solid loophole, but again, not at 7 or 8 years old. There is no statute of limitations on tax fraud, she said and it could come back to bite dd.

That's just my experience and what I know of it. I suppose if someone can get away with it without attracting attention from the IRS, and if they don't feel an ethical aversion to it, then go for it. Personally, it's just not worth it. Dd will be fine financially as an adult whether we start an IRA for her now or not.