Take home more pay. If your teen works a summer job, taxes can put a dent in his or her take-home pay.
Strategy: Have your child claim an exemption from tax withholding. To qualify, the child can't have owed any income tax in 2003 and must expect zero tax liability for 2004. The withholding exemption is available only if your child earns less than $4,850 this year. Logistics: All your child needs to do is write "EXEMPT" on Line 7 of Form W-4. The exemption is valid only for the current year.
'Tis the season for reduced withholding. Suppose your child doesn't qualify for the withholding exemption (explained above) due to the income limit.
Strategy: Arrange to have tax withheld under the "seasonal" or "part-year" method. This alternate withholding method, which effectively reduces the amount of withholding, is available only to people who work fewer than 245 days in a year. The withholding rate is calculated as if the child worked the entire year.
Get a head start on retirement savings. Even though your daughter works during the summer, you still probably give her spending money during the year.
Strategy: Have your daughter contribute her work earnings (up to $3,000) to a traditional IRA or a Roth IRA. She needs earned income to contribute to an IRA.
With a traditional IRA, the contribution reduces her current tax liability. Conversely, if she contributes to a Roth IRA, she can withdraw the money completely tax-free after age 59 1/2. Note: In both cases, your daughter could be hit with a 10 percent penalty tax if she withdraws money before age 59 1/2. But the penalty can be waived for special exceptions, such as withdrawals to pay for college tuition or to buy a first home.
Add Junior to the. Is your teenage son planning to spend the summer working on his tan? Put him to work around your company instead. If you hire him as an official employee, he qualifies for the same tax benefits as other employees. Also, his wages are exempt from FICA if he's under 18. However, the child's wages are subject to all federal if your business is incorporated. Note: You can take advantage of a potential income-shifting benefit if you siphon off compensation that would have been taxed to you in your high tax bracket and transfer it to your child in his or her low tax bracket.