Most of us recall how we felt when we were kids and started to make our own money. Then, if we wanted something, we didn’t have to “beg” our parents to buy it for us. Some of us had to work to earn money to help supplement the family income. Back then, most parents taught their children the value and dignity of hard work, and most kids were happy to find jobs. It felt good to have money in your pocket, but what really felt good was that new found sense of independence.
Very few children are concerned about income or payroll taxes until they get their first real paycheck. That first look at the difference between gross and net pay can be a real eye opener. It doesn’t take long for young workers to see how Uncle Sam just helps himself to a chunk of their money.
This is the time when many appreciate the statement made by comedian Chris Rock, You don't pay taxes - they take taxes.
PERCEIVED PROBLEM
In order for a parent to provide money to a child, the parent first has to earn the money and pay income/payroll taxes on it. Then, they can provide for their child out of what’s left over. This means that if a parent wants to give a child $100, that parent must earn at least $130 in order to net that $100.
However, if the money was earned directly by children and they had no other income, the income was taxed at a much lower rate than if the parents earned it themselves. So, many parents and grandparents lowered their tax bills significantly by transferring income producing assets into a child’s name.
When the “smart” people in D.C. figured out what they were doing, they decreed that wasn’t fair. So, in 1986, they passed the “kiddie tax.”
INCOME TAXES ON CHILDREN
The “kiddie tax” seeks to ensure that unearned income is reported and taxed. Like most changes to the Internal Revenue Code (IRC) to stop a perceived “abuse”, this change had unintended consequences. It ensnared all children—not just the children whose families were “abusing” the system.
When assets producing income are in a child’s name, or paid to a child from a trust, the “kiddie tax” kicks in. It affects the following types of unearned income:
- Dividends
- Taxable Interest
- Capital Gains
- Rents and Royalties
- Social Security benefits paid to the child
- Income from a trust
- Their unearned income is over $2,200 and is taxed at the parents’ marginal rate;
- Their earned income is over $12,400.
Currently, a child’s standard deduction can never exceed the larger of $1,100, or their earned income plus $350, with the maximum of $12,400. If a child receives only interest and dividends, then the parents may file a special IRS Form 8814, include that income and pay the income tax on the parent’s 1040.
For college-aged children, scholarships and fellowship grants aren’t taxable as long as the money was used for tuition, enrollment fees, required books or school supplies. But if the child uses the money for room and board, travel, optional equipment or study snacks, it is reportable as income. If the child was required to teach, do research or other work as a condition of receiving the scholarship or grant, the amounts received are reportable as income.
The child’s age has no bearing on the requirement to file a tax return. If a required income tax return is not filed, then the parents are liable for any unpaid taxes and penalties.
Complicated enough? You shouldn’t be surprised. The income/payroll tax system only makes sense if you want to oppress people.
WHEN THE FAIRTAX IS ENACTED
The FAIRtax makes no distinction between earned and unearned income. It doesn’t care how much money you make or how you make it. The FAIRtax repeals the Internal Revenue Code, abolishes the income tax, does away with tax returns and puts the IRS out of business. Under the FAIRtax, when a child earns money, from any source, it is taxed only if the child makes purchases of new retail goods and retail services.
Under the FAIRtax, tuition is not taxed. That means the cost of $10,000 in tuition is $10,000. Compare that to what happens with the income tax. In order to pay a $10,000 tuition bill today, a parent has to earn $13,000 or more to net that $10,000.
CONCLUSION
No matter how hard they try, the “smart people” just can’t make the “kiddie tax” do everything they want it to do. There are always going to be things they perceive as unfair and that need fixing. The more they tinker with it, the more adverse consequences there will be for children who are working and earning their own money.
For example, a business owner has two children and wants to set aside $12,000 a year for each of them for a college fund. If he contributes that money himself, the owner will likely have to earn $32,000 to $35,000 in order to net the $24,000 he needs.
However, if he employs his two children and pays each of them $13,000 per year, $26,000 in total, each child will pay 7.65% in payroll taxes ($995.00). However, no income tax is due because the standard exemption is $12,200. The children can then contribute $12,000 each to a 529 education plan and the earnings on the contributed money are not taxable.
The owner/parent can then deduct the $26,000 in wages as a business expense. Doing it this way reduces his cost of getting the money to his children from $32,000 or more to just $17,500 or less. Of course, the children actually have to work for the business.
The “smart people” who know best will likely make a rule that says something like, “Salary paid to a child who is still a dependent of his/her parents by a related party will not be deductible.” Is a relative a “related party”? Is a customer or friend of the parents a “related party”? The result will be to deny opportunities to children who need to work because the “smart people” want to “punish” those parents who may be abusing the system.
Anyone not steeped in the DC mindset probably has one logical question—WHY? Why do we need all of this complexity? The sad but true answer is that the incomprehensible, corrupt income/payroll tax system isn’t there just to collect revenue. The “smart people” who run Washington DC keep it in place because they use it to reap handsome benefits for themselves and their friends while making the rest of us pay for it.
Isn’t it time to stop punishing our children by letting the “smart people” dictate to the rest of us what is “fair”? Isn’t it time we stood up and let them know that is us, not them, who know what’s best for our children and grandchildren?
The solution—ENACT THE FAIRTAX. By eliminating the income tax, the FAIRtax eliminates the IRS and the abuses that come with it. With the FAIRtax, you pay your federal taxes at the cash register when you make retail purchases of new goods and services. No tax returns. No audits.
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”