Epic Real Estate Investing - How to Write Off Your Babies | 345

Episode Date: February 13, 2018

Hack the tax code and keep what’s rightfully yours! Pay the kids and pay yourself too. Learn how to make the most out of your work and family situations and create a stronger estate plan for your family. There is no holding back on Tax Hacker Tuesday with Tim Berry! ______   The free course is new and improved!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most? • E.ducation • P.roperties • I.ncome • C.oaching Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn't it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, attorney at law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what's rightfully yours.

It's time. for Tax Hacker Tuesday. Mo money, mow money, mow money, mow money. Mo money, what's that mean? How to keep it in the family. And how are we going to do that, Bernie? We're going to pay the kids. Pay the kids.

We are going to pay the kids, and they are going to have more understanding. You tell me how this works. Well, I was going to say, what do we care about the kids having mow money? I would have more money. Is this going to help me have more money? Duh. Okay, okay. You do think for a moment that we wouldn't be presenting all this to you out there if it wasn't going to benefit you and your children?

Good point. Good point. So let's talk about this. You want to take the ball and run with it? You want to hire your children. Okay. You want to pay them. Okay. And interesting, you can pay them up to $5,950 and not pay any tax on it. You have to hire your children, and they have to be under 18 years of age. For this particular idea to work. For this particular idea. But you have another concept. Can I stop you there? Let's explore this a little bit. Can I hire my kids to go wash my car?

Not really. They have to be connected to the business. So they've got to provide valid services for the business. Valid service. And quite frankly, there's a tax court decision that said you can hire a six-year-old. And he was picking up trash in a mobile home park for his mom and dad. And the tax court, the IRS, challenged it. And a tax court said, no, no, no.

He's allowed to do that because he's working for the family and he's providing a service and they're paying him. Got it. And so long short of it, kids have to provide a valid service. So if my kid, for example, he's probably going to be editing this videotape. Is that a valid service that he can be paid for for doing? Absolutely. And here's the other cool thing, too, is as my kid's editing this videotape, he's learning

how to edit video, which is a major component. going forward in the future of internet and everything. So not only am I getting money down to him in a tax-free manner, that first $59.50 is not going to be subject to taxes, but he's also learning a fantastic trader's skill. And by the way, that other component you want me to talk about? Yes. The 401K.

Yes. If the family has a 401K, now Junior can go from making $5950, completely tax-free in a given year. But now he could put in up to $17,000 into a 401K, So 17,000 plus, let's call it $6,000. That's $23,000 a year. Junior potentially could be earning, has to provide valid services, and it has to be, I don't want to call it validly paid, but you can't overpay them.

Everything has to be on the above board, and these are going to be heavily scrutinized by the IRS. But so long as the kid is providing valid services and you're providing a reasonable amount of pay, it's going to work. And by the way, this $23,000, that's a tax deduction for your business. That is a tax deduction for your business, and it lowers your taxable income. And I'm going to sling it right on back to you. Bernie, what happens whenever you lower your taxable income? When you lower your taxable income, you pay less taxes.

You pay less taxes. Did I do right? You did. Absolutely wonderful. But the great part, too, is as we lower your taxable income, like what we were talking about earlier, the phase-outs. Yes. Many things in the tax code depend upon what your adjusted gross income is. And whenever you start getting up in the above the hundreds, your ability to take certain

tax credits and certain tax deductions starts plummeting. But now if we start splitting the income of the family business from you and over to the kids, now there's a good chance that we're not going to be hitting those phaseouts if we do things correctly and that could be massively beneficial that could be saving you thousands of dollars just by avoiding the phase-outs but you know it's an interesting factor here we're talking about 17,000 being put into a 401k and also the 5,950 at this time being non-taxable to the children and a business deduction for the parents obviously a six-year-old is not going to contribute $15,000 where there were obviously but remember something that six-year-old becomes

nine years old becomes 13 years old, becomes 15 years old, becomes 16 years old, becomes 17 years old, and you can really get these people involved in your business. And by the way, the labor laws don't apply. Child labor laws, in most states, the child labor laws are not going to apply if they're working for mom and dad. And by the way, key point you bring that up. They have to be working for mom and dad for this to apply. There's a couple of entities that allow you to do this if you want to elaborate on that. on that. The LLC, so long as the LLC's owned 100% by mom and dad, we're good. Can it be an S

corporation? No, doesn't work because a corporation's a separate legal entity. Can it be a C corporation? No, it won't work because that's a separate legal entity. You know, and there's another key point that I know I wanted to bring up, Bernie, but I can't think of it. I'm having a teenage moment right now. Were there other, any other major key points we wanted to bring up on this? Well, I think the idea of having mom, and by the way, the interesting thing is about this, is that on our workshops and seminars, how many times have we brought this up, which is acceptable by not only the IRS, but tax court. The courts have already decided that children can work for their parents and their businesses, and everything that we outlined to you is completely accurate. But holy cow, there are so many people that sit there and say, I didn't know that. My tax preparer never told me about it.

And I'm sitting there and saying, your tax preparer, you need to question a tax but pay and say, I have this business. Can I legally hire my children and contribute to the 401K and outline exactly what Tim and Bernie said? And the answer is yes, you can. Absolutely. And, you know, the point I was going to bring up before,

I was going to give me an example and then bring up another issue. that's why I wrote that down real fast. We had a client just recently. His wife had a Schedule C. She had her own business. And Junior wanted one of these fancy, fancy, fancy Xboxes. Now, here's what they did. Junior comes into the wife's business about 20 hours a week.

He actually comes in after high school and works there for about 20 hours, being a receptionist, stuff like that. They pay him $10 an hour. That's $200 a week. $200 a week, let's say he works 50 weeks. That's $10,000. They're able to move over to Junior. Now whenever Junior wants to buy his fancy-dancy Xbox, he uses his earnings.

Mom and Dad paid for that Xbox effectively with pre-tax dollars. Now whenever he wants the fancy-dancies games, they use pre-tax dollars. Now whenever he wants to start taking karate lessons, pre-tax dollars. If he wants to take gymnastics dancing lessons or a female, a girl, use pre-tax dollars. And then with the excess money over and above that, we put it inside the 401K, the family's business gets a tax deduction, the kid doesn't have to pay taxes, and now we're saving for college in a tax deferred manner. It's a no-brainer.

Now, the key point I wanted to bring up, some people are going to say, well, Tim, this doesn't work. What about the kiddie tax? Well, here's the thing. The thing called the kiddie tax is where the kid's income is tax to the parents' tax brackets, but that only applies for the kid's unearned income. income, the kid's investment income. This is earned income, and so therefore, this is not taxed at the parent's brackets. And so long as the kid is under 18 and employed by mom and dad,

there is no employment taxes on this either. It's just a fantastic, wonderful way to dramatically lower your taxable income. Yeah, and I have to point out that I have been through audits where the audit, the I was questioning this, and I passed every audit that I had on it because there are publications that the Irish puts out on how to accomplish this. A circuit or E tells you how to accomplish this. But here's the key. Everything that we've outlined to you, you can do.

But if you get scrutinized, you need to do the following. Make sure that you're issuing your child a check each week. have a deposited in a bank account that maybe you're a co-signed around, but it's under the child's name also, and issue a W-2 at the end of year for the amount of money that you paid, and keep time records. If you do that, then you are complying with requirements that the tax court and IRS are saying, okay, so number one, we know that you are allowed to hire your children. You're keeping the records appropriately. late, you pass muster. You know, God bless.

So it comes down to they provide valid services, you pay them a reasonable salary, you make sure you document things because they're heavily scrutinized by the IRS, but at the end of the day, it means what? It means that you can have an estate plan for your child with present-day tax-free money. Actually, that is more high-flutant than I wanted. I want to go back to the beginning, Bernie. It means what? It means more money, more money. More money. Keep it in the family. That's it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry.

See you next Tuesday for another episode of Tax Hacker Tuesday. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.