You can employ your child in your business. Your business would reimburse your child for any job-related education expenses, including graduate courses. The expenses paid must be connected to the business and solely for the benefit of the business. The courses taken by your child/employee must not satisfy the business’s minimum education standards or qualify your child/employee for a new profession. Your child/employee would have to report the reimbursement amount as income.
Specific Details
The parents shifted $5,000 of income to their child by employing their child in their business and reimbursing their child for any job-related education expenses. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%). 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 $1,500.
Potential Savings
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by employing your child in your business and reimburse your child for any job-related education expenses.