Author: Leon Clinton

Working at a tender age is an American tradition. What isn’t so traditional is the notion of kids contributing to their own IRA, especially a Roth IRA. But it should be a tradition, because it’s a really good idea. 

Here’s what you need to know about IRAs for kids. Let’s start with the Roth IRA option. 

Roth IRA Contribution Basics 

The only federal-income-tax-law requirement for a child to make an annual Roth IRA contribution is to have enough earned income during the year to cover the contribution. Age is completely irrelevant. 

So if a child earns some cash from a summer job or part-time work after school, he or she is entitled to make a Roth contribution for that year. 

For both the 2021 and 2022 tax years, your working child can contribute the lesser of

• his or her earned income for the year, or 
• $6,000. 

While the same $6,000 contribution limit applies equally to Roth IRAs and traditional IRAs, the Roth option is usually better for kids.

Key point. A contribution for your child’s 2021 tax year can be made as late as April 15, 2022. So, there’s still time for that.

Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age

By making Roth contributions for a few years during the teenage years your kid can potentially accumulate quite a bit of money by retirement age. 

But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so. 

Say the child contributes $2,500 at the end of each of the four years. Assuming a 5 percent return, the Roth account would be worth about $82,000 in 45 years. Assuming an 8 percent return, the account value jumps to a whopping $259,000. Wow! 

You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age.

If you would like to discuss earned income and IRS options for your child, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 5, 2022

Let’s say you own the building. 

Now, let’s say that you rent this building to your business.

With no tax planning, you have a self-rental, and that

• makes rental income from this building nonpassive, meaning that it cannot offset any passive losses (very bad); and
• makes rental losses from this building passive losses, meaning that you likely cannot deduct the losses this year (also very bad).

So, there you have it: with no tax planning, you get the worst of both worlds.

Solution

But wait—there’s a solution (often overlooked).

Under a special grouping rule, you can qualify to group your separately owned rental building with your separately owned business and treat the two of them as one activity for purposes of the passive loss rules.

Ownership

Rental. Your ownership of the rental might be as an individual, an S corporation, or an LLC. For this strategy, you can use any of these forms for your ownership. 

Business. You can own the business as a proprietorship, an S corporation, or an LLC—all these forms work for this strategy.

Note that the C corporation does not work. 

Two into One

What makes two into one possible? Your ownership!

The regulations say that if each owner of the business has the same proportionate ownership interest as each owner of the rental, then the taxpayers may group the business and rental activities as one activity.

Technically, the rental and the business need to pass the appropriate-economic-unit test, which gives great weight both to the extent of common control and to the extent of common ownership. 

You have no problem here because you have both 100 percent control and 100 percent ownership of both the business and the rental. This puts you home free on this test.

And if you are married, you can include your spouse in the mix.

If you would like to discuss the self-rental rules, please call me on my direct line at xxx-xxx-xxxx.

• By Leon Clinton
• March 31, 2022

Do you have a beach or mountain home that you rent out?

If the average period of rental is less than 30 days, you likely have a choice—either

• claim the income and expenses on Schedule C, or
• claim the income and expenses on Schedule E.

When Is Schedule C a Good Choice?

If you show a tax loss on your rental property, Schedule C is a great choice because it allows you to deduct your rental losses against all other income (assuming you materially participate in the rental property).

If you show taxable income on the rental property, Schedule C is not good because it causes you to pay self-employment taxes.

When Is Schedule E a Good Choice?

If you show taxable income on the transient rental, Schedule E is best because you don’t pay any self-employment taxes on Schedule E income.

If you show a loss on your transient rental and you materially participate, you can deduct your losses against all other income, but those Schedule E losses do not reduce self-employment income.

Okay, now you know how to play the game.

IRS in Summary Mode

In recent advice, the IRS stated that rentals of living quarters are not subject to self-employment tax when no services are rendered for the occupants.

But if services are rendered for the occupants, and the services rendered

1. are not clearly required to maintain the space in a condition for occupancy, and 
2. are of such a substantial nature that the compensation for these services can be said to constitute a material portion of the rent, 

then the net rental income received is subject to the self-employment tax.

If you would like to discuss the transient-rental rules, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 27, 2022