Hi All! I opened Roth IRAs at Vanguard for my grandchildren, ages 12 and 8. They earned $842 and $432 in 2016 doing odd jobs around the neighborhood. Must they file a 1040, attach Schedules SE and C-EZ and pay the 15% social security/medicare tax? An afternoon of Excedrin-bolstered searching on the 'net produced the following murky results:
1. Kiplingers says no, that a child under 18 performing part-time work as a household worker is exempt; being a student is their primary occupation, etc.
2. Fairmark.com says yes, that the child is responsible for filing, with adult help if necessary.
3. Fidelity's Roth IRA for Kids posting on their website says 'in some cases taxes may be due. Check with your tax advisor.'
4. IRAKids.com, a sort of grass roots endeavor, advises filing and posts copies of the 1040, C-EZ, and SE.
5. Vanguard will not offer tax advice.
What's the story here? While I'm opposed to filing, I also do not want my daughter, who is serving as custodian, facing the warm fuzzy wrath of the IRS.
Has anyone here had experience with this sort of thing? TIA
best, hawk
Comments
I'm thinking back years now ... and, I had to file a return on my son because of the amount of his unearned income. With this, I located an article that covers what tax payers must do. Scroll down to you come to dependents and also other situations that might apply.
https://www.thebalance.com/are-you-required-to-file-a-tax-return-3192868
I'm no tax expert now ... but, with them holding roth ira's I going to say yes so that the funding amount in the roths can be tracked along with the verification of earned income.
Hope this helps ...
Skeet
Most of what Skeet's report is saying is straight from the IRS (they say it's from Pub 17, but that in turn is from Pub 929.
What caught my eye there, especially given hawkmountain's figures was the $400 threshold for self-employment income. That's earned income where you're not a W2 employee.
Pub 929 (and The Balance) apparently say yes: "A dependent must also file a tax return if he or she ... Had net earnings from self-employment of at least $400"
Bankrate.com (Teen Jobs and Tax Issues) gives this example: "She offered piano lessons and didn't make enough to file a tax return, but owed $80 in self-employment" (because of the $400 filing requirement)
Even Kiplinger seems to say yes, at least in some columns: A more arcane question is whether the children have to register with the state as unincorporated businesses (as is typical for self-employed people). I haven't a clue.
You noted that minor accounts have been opened, but have they been funded yet? I ask, as to avoid all of the theoretical tax "stuff"; to fund the accounts at $399. I note further down this page about record keeping to maintain with the minor accounts paperwork, which will include the receipt of a form 5498 for each minor Roth IRA.
This first paragraph next is the common language found at many web sites. Obviously, opinion; but not legal advice. I'm sure you've seen this, too.
If the wage is paid by you or other family members, just keep records that include the type of work, the date of completion, the employer, and the agreed upon wage. You can include work done around the house provided it is legitimate and the pay is at the going market rate.
Implied with the above from a prior thread note I posted:
"The important thing to remember is that your child must have earned income during the year for which a contribution is made. Money from allowance or investing income does not count as earned income and, therefore, cannot be used towards contributions. Ideally, your child will receive a W-2 for work performed; otherwise, it is a good idea to keep excellent records from jobs that don’t provide a W-2: babysitting, yard work, mothers’ helpers, entrepreneurial endeavors, etc. Your records should include:
Type of work
When the work was done
For whom the work was done
How much your child was paid"
>>>Language from Fidelity custodial minor Roth IRA application form:
Please note that in order to open and contribute to this
account, the minor must have taxable compensation equal to
or greater than the amount of the annual contributions made
to his/her IRA each year. Please review IRS publication 590-A
for a definition of taxable compensation.
>>> From a section of the application regarding the minor:
Income Source Industry regulations require us to ask for this information.
Employed: Self-employed: (check one of these)
Occupation Employer Leave blank if self-employed.
Employer Address
City State/Province ZIP/Postal Code Country
Not employed: (this is also an available check box at the end of this section....one may suppose to use this if the above, Employed or Self-employed; are not check, eh? I don't know whether Fidelity would reject the application if one only checked this box for "Not employed", and then indicate the Source of Income, which has a "fill in the box" for your own comment about income source; i.e., yard work. This is very confusing, IMHO.
Source of Income Spouse, etc.
Ed Slott, minor Roth IRA site link here.
ADD: YouTube a few videos... https://www.youtube.com/results?search_query=roth+ira+for+minor
@msf and his offering of the bankrate.com link is one of the better detailed descriptions I have read regarding the $400 limit.
Lastly, I know all Fidelity IRA's now automatically include the brokerage feature. Is this the case for Vanguard? I ask, as this would allow for the purchase of etf's within the minor Roth accounts; otherwise contributing enough money over the years to attain a minimum for investment in a mutual fund would really throttle back the ability to have the wonderful affect of compounding for these accounts. Example: VTI is about $122/share to purchase and $399 would purchase 3 shares of VTI with $33 remaining to float in a MM account or to purchase another appropriate etf with the $33 balance.
'Course, the guidelines (IRS); versus those who interpret many times have different paths. I do not find any IRS tax court cases related to minor Roth IRA accounts. And part of all of this too, is of course; this "income" is not generated and shown on a W-2 (yet) and that won't be the case until age 16 (child labor law, eh?) and when the minor may have employment that requires a W-2 filing.
I know you are already on "overload" with all of this, but tis a good plan. Keep at it.......
Take care,
Catch
However, Vanguard was happy to cash my check and fund the accounts, and recommended an ETF, so you were right on target. I am looking at their VUG which has some cool things in it a kid might recognize.
Well, "overload" has hit...the thread on Scotch Whiskey came along just in time...
cheers, hawk
You noted: "VUG which has some cool things in it a kid might recognize" YES!!!
Have had this same discussion with a "teen" (yes, we know they think they know everything they need know......just ask them, eh?) and printed the first 90 largest holdings in a broad based U.S. equity index and same for a bond index. LOOK!, you own a piece of Apple, Google, Microsoft, Intel, Ford, Samsung, Amgen.........etc., etc., etc. They do absorb these things, although not always apparent at the time.
I just added this link to the first write. Minor Roth IRA video chats....a few.
https://www.youtube.com/results?search_query=roth+ira+for+minor
You noted: "All the boilerplate you cite is ass-covering, of course."
I'll take the "you" as to me.
The boilerplate I will presume is the legal cite from the vendors offering minor Roth IRA's. If so, yes; you are indeed correct. The vendors are in compliance with their guidance relative to IRS rules and regs, yes?; in addition to everything that has been added related to the "Patriot Act" compliance.
Why are you against opening a minor Roth IRA, at least; prior to a minor receiving a W-2 wage statement for their work?
Regards,
Catch
I know something (a little anyway) about compliance, doing this sort of copy / paste editing and original writing / rewriting of prospectus text for freelance work, irregularly. It is not easy dealing with that kind of lawyering. I agree that it gets worse by the year. Sometimes anyway. Some years it gets better.
I do not get your last Q. I opened Roths for my two kids the year they were legit. 15-20y ago. I never have dreamed of filing, and did not file, a tax return for them. Fret 'rules' aside, no one cares, no one tracks. I would do the same now.
My bad............too long a day for my brain on Sunday.
I misread your " I sure would not file for either" as to I wouldn't "file(as in open)" a Roth for a minor.
I apologize.
Regards,
Catch
If after 5 summers he or she has grown a large mowing service, has bought several machines, includes pals, and advertises, then maybe.
No one is ever going to check, and no one cares. Fidelity and Vanguard etc. do all the tracking one needs.
I've exhausted my linkages, to the best of my knowledge, as of today.
Here is an interesting notation from Fidelity, from the below linked article:
"If your child is not filing a tax form that covers his or her earned income, consider maintaining a written log of their earnings in case the IRS asks questions."
https://www.fidelity.com/learning-center/personal-finance/retirement/turbocharge-childs-retirement
One may presume if the IRS starts auditing minor Roth IRA applications, which have been opened with fully righteous considerations; many other events to the negative side have already taken place.
Regards,
Catch
"done!"
If the work is being done as contract work (see IRS Tax Topic 762), then the $400 threshold for SE tax still seems to apply.
There's a similar exception for child newspaper deliverers (again, if they're employees). See this IRS FAQ: My son is a newspaper carrier.
You find these in Circular E (Pub 15). See the Special Rules Table here. It lists exceptions for family employees (under 18 and under 21), household employees (under 18), and newspaper carriers (under 18).
Tax Topic 756 also addresses household employees.
The difference between employee and contractor is discussed in Tax Topic 762.
Note also that while a child can earn income (in the IRS sense) for chores performed for the neighbors, it appears money received for the same chores performed for the parent may not be considered earned income. Rather, the chores are treated as part of "parental training and discipline."
http://www.bakertilly.com/insights/hiring-your-children-tax-savings-and-doing-it-the-right-way/