May I ask you a question?
Why don’t we grab opportunities that stare us in the face?
Is it because we don’t know how to take advantage of them?
In my case, no one explained how to use the earned income tax strategy for dependents.
It’s completely FREE money! And a lot of it… year after year!
So let me explain what you can do even if you’re nearly flat broke.
But first, a disclaimer…This isn’t tax advice. I am not a Certified Public Accountant.
I’m simply telling the story of the Vacationing Landlord:
The Vacationing Landlord
There once was a cash-strapped landlord.
He had a wife and a child.
Poor fellow didn’t have any extra money. His rental cash flow was barely enough to cover vacancies and repairs. For some reason his bank account was not growing.
However, he did do one thing right…
After learning about the IRS Publication 929’s earned income rules for dependents, he took action.
The rule says that dependents can earn up to $6,300 without having to file. And since he operated a rental business, although just a tiny one, he decided to hire his own child.
Recycling $500 Creates $6,000
The cash-strapped landlord only had $500 to spare. But that didn’t stop him.
He opened a joint checking account in his name and his child’s name.
He then transferred $500 from his rental’s business account into the joint account. This was his child’s first payment.
Then, a week later, he withdrew the $500 from the joint account and returned it to the business account. The recycling process was complete.
This happened once a month until it occurred to him…
Automating Creates Passive Income
He thought, “I should just set up automatic transfers. I don’t want to keep thinking about this.”
So, he did. He scheduled a $500 transfer from his business account to occur on the 10th and a return transfer to occur on the 15th.
He put his recycling on auto-pilot!
Making Year-End Preparations
At the end of the year, the landlord printed a summary of his transfers. He was able to show that:
1 – His child was “paid” a total of $6,000 ($500/month x 12 months)
2 – His business incurred $6,000 in tax deductible expenses.
He also completed IRS forms to report the wages and made sure timecards and other backup documents were up to date as well.
Meeting His Tax Preparer
As normal, the landlord met with his tax preparer and showed him the documents.
The tax preparer said, “Nice, work! This will reduce your taxes by… Hmm…Let’s see.
You’re in the 25% tax bracket…
The $6,000 you paid your child will save your business $1,500!”
And so it did.
$1,500 Refund Pays for Vacation
His tax refund helped his family take a Disneyland vacation. And they did this year after year.
So much so that his friends call him “the Vacationing Landlord.”
But things changed once they had another child.