If a child is an employee of a parents business income may be shifted to the child through employee fringe benefit programs, such as reimbursement for employee car expenses or computers and cell phones. The business would receive a tax deduction for these expenses and the child would have to report the value of the personal use as a taxable fringe benefit.
The parents shifted $5,000 of income to their child by using employee fringe benefit programs. 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.
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 shifting income to your child through employee fringe benefit programs.