The parents may hire the grandparents for financial aid benefits and tax savings. Thus, the parent may be able to hire one or both of the grandparents, deduct their salaries, and shift income to their low brackets. This may be an ideal way to provide them with financial support, if that is necessary. In addition, if the child qualifies for financial aid, it will lower the parents income and increase the childs financial aid eligibility.
Specific Details
The parents shifted $5,000 of income to their parents by hiring their parents. 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 grandparents 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 hiring grandparents.