If a client is aware of an investment that has appreciation potential, instead of purchasing the investment the client could direct a child to make the investment. If necessary, sufficient cash or other assets can be given to the child so that the child can make the purchase. If the investment opportunity involves a business, bringing a child in as a shareholder or partner from the inception of the activity can produce long-term income shifting tax savings.
Specific Details
The parents shifted $5,000 of income to their child by directing the child to make an investment. Since the parents income was taxed at the 20% tax bracket, the income reduction may decrease their income taxes by $1,000 ($5,000 x 20%). Since the childs taxable income was taxed at the 0% tax bracket, there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,000.
Potential Savings
If you are in a combined (federal, self-employment, and state) tax bracket of 20%, you could reduce your taxes up to $200 for every $1,000 of income reduction by directing your child to make an investment instead of you making the investment.