Finally a tax break to help small business. This will include anyone getting pass through income such as a sole proprietor, Sub S income, LLC, or LLP. Individuals who earn income through pass-through businesses may qualify to deduct from their income tax an amount equal to up to 20% of their “qualified business income” (“QBI”) from each pass-through business they own. QBI is the net income (profit) your pass-through business earns during the year. It is essentially net income from your pass through businesses. QBI includes rental income so long as your rental activity qualifies as a business it will qualify too.
20% Deduction for Taxable Income Below $315,000 ($157,500 for Singles)
Now here is what I see as a planning point. In the past it has always been beneficial to be an employee as opposed to a 1099 contractor. With this 20% deduction most people would benefit from being a 1099 contractor. Certainly worth taking a look at the total picture. I’ll have more on this later.
For 2018 you can pay your child up to $17,500 (standard deduction equal to earned income up to a maximum of $12,000, plus $5,500 deductible IRA contribution) without either of you incurring a tax liability. That’s because reasonable wages you pay to your minor child to work are fully deductible as a legitimate business expense, lowering your gross income. For your child, the standard deduction and IRA contribution eliminates all of the tax on the child’s income. And since the money was earned, the “kiddie tax” doesn’t apply even if your child is under age 18. Note the term reasonable wages. This is not a cheat its a legitimate tax saving opportunity and a great learning opportunity for your child.
How much you save in tax by doing this is dependent upon your tax bracket. If you are in the 24% bracket and you maxed it out as shown above you save $4200 in income tax plus another $2677 in net self employment tax. That is is $6877 is tax savings for the parent doing this for one child. Note that your child could have some state liability with this strategy if you reside in a state that has income tax. There are lots of moving parts in this strategy so consult with a CPA to make sure you know all the ramifications.