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Hi all!

Recently had a big change: DW decided to be a stay at home mom.

So, we no longer have her salary. However, she has been 'helping out' some of the contractors from her old job. She has so far gotten a check for about $300 (not much, I know, but I am wondering what happens if she does this a few times a month--we dont know how often she will get called)

Also, DD (5 months old) just got signed to be a baby model.

We are trying to balance being "high maintenance parents" and asking 'too many questions' of the agency (VERY competitive to get representation), so I am not sure yet whether the client would pay my DD directly (which could mean--if we are lucky and successful--dozens of 'employers) or if they pay the agency which would in turn pay us.

So, my tax question:
1) if the contractor pays DW but doesnt send us a W2 or 1099 and writes off the expense, do we get taxed on it? How do we document it if we need to declare? If he writes off the expense, is the IRS notified even if he doesnt send her a 1099, etc?

2) how does DD's earnings factor in when we file taxes? DW and I file 'married, filing jointly.' Do we need to include DD earnings when we file (we would be claiming her as dependent)? Part 'B' of this question is a repeat of question 1, but as it relates to DD. Particularly if we get multiple small checks (< $1,000 each) from different companies.

Thanks in advance! I want to make sure we do the right thing here :-)
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1) if the contractor pays DW but doesnt send us a W2 or 1099 and writes off the expense, do we get taxed on it?

Yes, it's taxable income to you, regardless if you get a W-2 or 1099.

How do we document it if we need to declare?

You keep lists, or books & records, if you will, of your income and expenses.

if he writes off the expense, is the IRS notified even if he doesnt send her a 1099, etc?

No. But it's still taxable income to you.

how does DD's earnings factor in when we file taxes? DW and I file 'married, filing jointly.' Do we need to include DD earnings when we file (we would be claiming her as dependent)?

The income is your daughter's, not yours. You have to file a return for her if she has over $400 in self-employment income. [That's the lowest pertinent filing requirement I can think of.]

Part 'B' of this question is a repeat of question 1, but as it relates to DD. Particularly if we get multiple small checks (< $1,000 each) from different companies.

Same answer as above. You have to keep records.

Bill
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She has so far gotten a check for about $300 (not much, I know, but I am wondering what happens if she does this a few times a month--we dont know how often she will get called)

That's taxable income. If the total gets over $600 in a calendar year, she'll likely get a 1099. But the 1099 is not necessary to make it taxable income.

so I am not sure yet whether the client would pay my DD directly (which could mean--if we are lucky and successful--dozens of 'employers) or if they pay the agency which would in turn pay us.

Sorry - the client will pay your daughter directly. And if things go well, she'll end up with many W-2s. Probably no 1099s, as models and actors are generally considered employees rather than independent contractors. The fun part is that the money will likely go through your agent, who will take his cut before sending you the balance. Your DD gets to report the whole amount - before the agent's fee - as taxable income. The agent's fee is a miscellaneous itemized deduction, subject to the 2% of AGI floor.

1) if the contractor pays DW but doesnt send us a W2 or 1099 and writes off the expense, do we get taxed on it?

Yes.

How do we document it if we need to declare?

You don't really need to document your income. The IRS will take your word for it as long as they have no reason to suspect you are hiding income.

If he writes off the expense, is the IRS notified even if he doesnt send her a 1099, etc?

No.

2) how does DD's earnings factor in when we file taxes? DW and I file 'married, filing jointly.' Do we need to include DD earnings when we file (we would be claiming her as dependent)?

DD will file her own tax return. As a dependent, she gets a smaller standard deduction and no personal exemption.

Part 'B' of this question is a repeat of question 1, but as it relates to DD. Particularly if we get multiple small checks (< $1,000 each) from different companies.

The threshold for an employer needing to file a W-2 is effectively zero (it might be something like $10). And as I noted, models are generally employees, so expect W-2s for her work AND all of the related tax withholdings (Social Security, Medicare, Federal income tax, and any state payroll tax deductions).

From a practical standpoint, I'd keep your own records of these payments. No so much for tax reporting, but to be sure you actually get paid for all of the work. The creative community is notorious for poor recordkeeping. You'll want to keep your own records and not necessarily trust theirs. You'll also need to know that to claim your fees your DD pays to her agent as a tax deduction.

The good news for DD is that this is all earned income. So she can make IRA contributions! Generally, a Roth IRA would be the choice, as she probably won't need the deduction for traditional IRA contributions. She's got the same limit as anyone else - $5,000 or the amount of earned income, whichever is smaller.

--Peter
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A few more words about the next Shirley Temple's earnings. I rather expected Peter to bring this up since he practices in the Land of Fruit and Nuts, but maybe he's lucky enough never to have run into it. I, however, even during my brief CA sentence, learned a lot about child actors.

I believe Jackie Cooper's was the most prominent example of parents stealing their child stars blind, but CA has incredibly strict laws about these things, and I would think it would apply universally that this is your child's money, not yours. Make sure you get legal advice as to exactly how you must handle things.

And remind her to smile on the red carpet. Spitting up simply will not do.

Phil
Rule Your Retirement Home Fool
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I rather expected Peter to bring this up since he practices in the Land of Fruit and Nuts, but maybe he's lucky enough never to have run into it. I, however, even during my brief CA sentence, learned a lot about child actors.

I had something on that in the draft reply kept in my head. Unfortunately, it must have leaked out my ears before it made it to my finger tips.

You are quite correct. The daughter's earnings are her money and not the parents'.

That money needs to be kept in a separate account so she can squander it herself when she turns 18. The parents cannot do the squandering for her. ;-)

More on track - that's where the IRA comes in. Putting her earnings into an IRA provides tax sheltered growth AND keeps the money in an appropriately separated account.

<grinning>
Then, when the kid squanders it at 18, the government gets a cut so they can join in the squandering as well.

--Peter
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lol!

Well, first of all, I am a little concerned about all these expenses.

We live in NYC, and have no idea how much work DD will actually get. At worst, DW will be driving in to the city (up to $13 in tolls each time + $20-$50 in parking) a bunch of times before landing a gig that would be limited (justifiably so) to 2 hours of work. If she lands 1 out of 10, that leaves very little profit.

Now with the tax implications, I am very concerned that we will spend more than she earns.

A couple of follow up questions (by the way... THANK YOU for terrific info!):

1) if DD does get hired, does that mean she pays for tolls and parking? Then she could deduct that?
2) The only reason we are doing this is to try to fund her 529. I have a savings account that I control, but she is beneficiary. From this account, I was planning on moving the funds to my account to deposit into her 529 (and thus deduct on my NY State tax return. Based on this info, sounds like that would not be legal? I suppose I could leave the funds in her savings account then fund her 529 from there and deduct from her state tax return? I assume that would be a lesser deduction than if it were off DW and my return....

Thanks again!

-k

PS-- we draw the line at Toddlers and Tiara's :-)
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1) if DD does get hired, does that mean she pays for tolls and parking? Then she could deduct that?

I'd say yes. She would deduct the tolls and parking, for both the gigs she gets AND the auditions that don't result in work. These are probably employee business expenses (most of the time she will get a W-2 and not a 1099) and will end up on schedule A.

2) The only reason we are doing this is to try to fund her 529. I have a savings account that I control, but she is beneficiary. From this account, I was planning on moving the funds to my account to deposit into her 529 (and thus deduct on my NY State tax return. Based on this info, sounds like that would not be legal? I suppose I could leave the funds in her savings account then fund her 529 from there and deduct from her state tax return?

I'm not very good at 529 plans, so wait for the inevitable corrections. 529 plans are funded by parents (or others) for a beneficiary - typically their child. So I don't think DD could contribute to her own 529 plan. And I don't think that transferring the money from her to you so that you can fund a 529 plan is an acceptable use of her funds.

In short, I don't think this is a good way to fund a 529 plan.

--Peter
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Now with the tax implications, I am very concerned that we will spend more than she earns.

The price of fame. See La Boheme and keep her out of drafts.

Since even as a dependent she'll get a standard deduction up to the Single limit or her earned income plus change, the employee business expenses will wind up with no tax benefit, just like they do for most employees. Bitter lesson learned too early in her life, so write it down for her so she can reflect on it later. It's not quite bronzed booties, but....

I'm no expert on 529's either, but I strongly endorse Peter's idea of funding a Roth IRA, which should be a legal use of her earnings. Max investments while she's young coupled with raising her a Fool should leave her situated to support you in the style you'd like to be accustomed to in your dotage.

Phil
Rule Your Retirement Home Fool
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So I don't think DD could contribute to her own 529 plan.
DD probably* can fund a 529 with herself as beneficiary - but ...

I don't think that transferring the money from her to you so that you can fund a 529 plan is an acceptable use of her funds.
I'd agree that using that money for account with DD as bene, OP as account holder doesn't seem kosher to me.

DD as bene and account holder seems like acceptable use - but I think Roth IRA would be better saving mechanism than 529 with DD as bene & account holder. (You can look further into the pros/cons between those two options - http://www.savingforcollege.com/compare_savings_options/ )


Of course I do not want to discourage you from using other $ to fund a 529 and get the NY tax deduction. I don't know NY's rules, but some of the states make it a very good effective ROI by contributing to their 529 - at least for the first year. :)


* there might be some limitation of account holder having to be 18 - you'd have to look into UGMA-529: http://www.savingforcollege.com/articles/should-you-open-an-...
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This thread hasn't let me down! I LOVE the TMF! :-)

I am starting to think that some form of an IRA might be best for her over a 529 with the funds she is earning...

I guess (and this may be for another board) that the Roth IRA might be more beneficial than a traditional here?

My thinking is that she is most likely (*hopefully*) in the lowest tax bracket she will ever be in--therefore the the growth/earnings would be tax free in 64.5 years--then again, who knows what the tax landscape would be then--whether Roth IRAs will continue to exist at all... But I digress...

Anyway, this has been a wealth of information. And Phil highlights a great point... Never to early for Fool School!

:-)
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I guess (and this may be for another board) that the Roth IRA might be more beneficial than a traditional here?

My thinking is that she is most likely (*hopefully*) in the lowest tax bracket she will ever be in--therefore the the growth/earnings would be tax free in 64.5 years--then again, who knows what the tax landscape would be then--whether Roth IRAs will continue to exist at all


First, a note about attitude adustment. My dream, which I hope is shared by all, is to be in the highest tax bracket, not the lowest. People get so fixated on reducing taxes that they lose sight of the fact that the higher your income, the more $$ you have after taxes regardless of your bracket.

Now, back to reality. It's most likely that, at least in the beginning, DD's earnings will be less than the standard deduction. OTOH, she may be the new Gerber baby. And depending on her adorable factor, once she starts talking, watch out. I once spent a flight from Seattle to LA chatting with the father of an 8 year old who was just starting filming his second TV series. The kid was earning much more than his parents combined.

All this is leading to a Roth is probably the better IRA bet because it's likely she'll be paying little, if any, income tax. And remember that while you must make an IRA contribution for the prior tax year by April 15, you have until October 15 to change your mind about Roth vs traditional.

I don't know any better than you the future of Roth accounts, but I'm extremely doubtful that changes to existing accounts would be made retroactively.

Phil
Rule Your Retirement Home Fool
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Now, back to reality. It's most likely that, at least in the beginning, DD's earnings will be less than the standard deduction. OTOH, she may be the new Gerber baby. And depending on her adorable factor, once she starts talking, watch out.
==========================================
I was convinced my granddaughter would be a great E*Trade baby.

But now that she's 2, she's a little over-the-hill for that sort of thing. But she could probably figure out how to trade stocks with an iPhone accidentally. (A GREAT poster child for E*Trade!)

Bill
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So, DD has had some work!

Not a windfall, by any stretch, but earnings have exceeded costs with a little left over for contributions to either IRA or 529 (leaning back towards 529 after discussion with my accountant... Asked him to confirm that she can contribute to her own plan first *grin*)

So, we (DW & I) have been paying for tolls, parking, etc. DW has kept a ledger with info on how far she drove, tolls and parking fees. Will that suffice for us to reimburse ourselves for these costs?

Do we need to keep actual receipts as well?

Thanks again!
K
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fyi... the 529 I have set up for DD is owned by me, but DD is beneficiary... Not sure if that makes a difference
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So, DD has had some work!

Not a windfall, by any stretch, but earnings have exceeded costs with a little left over for contributions to either IRA or 529 (leaning back towards 529 after discussion with my accountant... Asked him to confirm that she can contribute to her own plan first *grin*)


Previous posts in this thread have all favored contributing to a Roth IRA over funding a 529 with her money. I can't think of any reason your accountant would suggest otherwise. NY offers a state income tax benefit for contributions to the NY529 plan, but that benefit would be worth far more to you (parents) than to DD who won't have earned enough to owe any NY income tax.

So, we (DW & I) have been paying for tolls, parking, etc. DW has kept a ledger with info on how far she drove, tolls and parking fees. Will that suffice for us to reimburse ourselves for these costs?

Do we need to keep actual receipts as well?


Keeping receipts is best, but a well documented diary with supporting documentation should be sufficient. Of course, if you want to maximize the benefit your daughter gets from her income, you should consider your out-of-pocket expenses as a gift to her. She'll report more income and can make a larger contribution to her Roth IRA.

Ira
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fyi... the 529 I have set up for DD is owned by me, but DD is beneficiary... Not sure if that makes a difference

It makes a BIG difference. You make contributions into a 529 owned by you (and you get the NYS tax benefit if invested in the NY529 plan). She makes contributions into a 529 owned by her and she get the tax benefits. There is also the issue of whether she can contribute to her own 529 considering her age.

Ira
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fyi... the 529 I have set up for DD is owned by me, but DD is beneficiary... Not sure if that makes a difference

I'm not very good with 529 plans, so take this with a grain of salt.

However, I think it makes a big difference. If you are the owner of the 529 plan, but take your DD's earnings and put it in there, I think you are transferring money from her to you. That she is the beneficiary is not important. You are the owner, and retain the right to withdraw the money (and take some tax penalties) or name a different beneficiary.

In effect, putting her money into that 529 plan is taking her money from her.

How that impacts you both morally and legally is not something I'm qualified to talk about.

--Peter

PS - OK, we're all qualified to talk about morals, but that is a matter for a different board. But I'm definitely going to avoid the legal questions.
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Of course, if you want to maximize the benefit your daughter gets from her income, you should consider your out-of-pocket expenses as a gift to her. She'll report more income and can make a larger contribution to her Roth IRA.
I agree - up until she starts making enough that she has to pay taxes. (at which point you have to ask yourself if she's better off paying the taxes now on that money, and putting it into the Roth - or not paying taxes on it, and claiming the expense.)
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I think the main issue with IRA/ROTH IRA is that DD would be able to do something foolish, as opposed to Foolish, once she hit 18.

With 529, it must go to educational expenses.

I have also been doing some digging at my companies annual benefits fair... NY State 529 had a booth.

They explained it much like some of the posts here. By moving the money from her savings account (I am custodian) to the 529 I have set up, it would essentially by her giving money to me. They (like the previous post) suggested I talk to a tax attorney for actual legal advice. What I came away from that discussion was that it "could" be consider her 'gifting' the money to me--though it would be put into an account for her benefit.

OTOH, if I was able to set up a 529 in HER name as owner, with me as custodian, financial aid formulas would penalize her for having more assets. This is where funding a retirement account would be preferable...

Thanks for the continuing conversation here! This is both fascinating and infuriating stuff :-)
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I think the main issue with IRA/ROTH IRA is that DD would be able to do something foolish, as opposed to Foolish, once she hit 18.

With 529, it must go to educational expenses.


Not so fast. Just like an IRA/Roth IRA can be used foolishly by her, so can a 529, if it's in her name. Only if the 529 is in your name can you control the disbursement of funds.

AJ
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They explained it much like some of the posts here. By moving the money from her savings account (I am custodian) to the 529 I have set up, it would essentially by her giving money to me. They (like the previous post) suggested I talk to a tax attorney for actual legal advice. What I came away from that discussion was that it "could" be consider her 'gifting' the money to me--though it would be put into an account for her benefit.

As the previous reply noted, a 529 can be used for any purpose. However, there are penalties associated with using a 529 for other than qualified education expenses.

The problem with DD gifting the money to you to place in a 529 for her is that she is "incapable" of making that gift. That is, she doesn't have the legal capacity to make a gift.

Ira
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The problem with DD gifting the money to you to place in a 529 for her is that she is "incapable" of making that gift. That is, she doesn't have the legal capacity to make a gift.

I was involved in a recent discussion of this point elsewhere and learned that most, if not all, 529 plans have procedures for transfers from UTMA accounts. In effect, the 529 retains UTMA characteristics until the beneficiary reaches majority.

Phil
Rule Your Retirement Home Fool
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The problem with DD gifting the money to you to place in a 529 for her is that she is "incapable" of making that gift. That is, she doesn't have the legal capacity to make a gift.

I was involved in a recent discussion of this point elsewhere and learned that most, if not all, 529 plans have procedures for transfers from UTMA accounts. In effect, the 529 retains UTMA characteristics until the beneficiary reaches majority.


My language was imprecise. I meant to address the issue of transfering the funds to a 529 owned by the parent, not a custodial 529.

Ira
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OTOH, if I was able to set up a 529 in HER name as owner, with me as custodian, financial aid formulas would penalize her for having more assets.

I believe that they adjusted it so that UTMA 529s are not penalized anymore. (the 529 assets are treated as parental assets)
http://www.savingforcollege.com/intro_to_529s/does-a-529-pla...

This is where funding a retirement account would be preferable...
Well - slightly preferable - it'd be 0% instead of 5.6%.
But then I *think* a withdrawal would be considered as income when calculating contribution for the following year.
(IOW, use the Roth to save up money and use the Roth contributions for the last year of school.)
But I'll strongly encourage you to find more reliable source than a semi-anonymous message board poster. :)
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You may want to look at this blog - http://www.minorcon.org/index.html.

I think the main issue with IRA/ROTH IRA is that DD would be able to do something foolish, as opposed to Foolish, once she hit 18.

With 529, it must go to educational expenses.

Did you ever go look at fairmark.com concerning tax issues for minors ?

You also may want to consider the ethics of what you are doing and consider teaching your child how to handle money along the way instead of making the assumption that she would make poor choices.

If college for her is important to you, consider saving your money to pay for it.
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