Financial Advisors/CPAs??

[Codewiz]

Ok, I am just getting started on my research of this subject so I don't need to hear that I should go talk to a local financial advisor. When I am better educated on the subjects then I will do so.

My wife and I are getting ready to have children. We both work and combined make 6 figures. We put the maximum allowed into a 401K and we will be starting IRAs this next year to contribute the maximum to those.

When we have kids, we are hoping that my mother can move down and help with child care. Would it make more sense to pay her directly in cash(1K a month) and let her buy a townhouse. Or should I just buy a townhouse for her and start my own LLC? I could then pay her 1K for childcare then she turns around and gives me the money back for rent The net effect if I buy a townhouse is that she is staying down here rent free and takes care of my children during the day.

If I pay her directly I will not be reaping the rewards of child care tax credits. Either way paying her or buying a townhouse, it will cost me about 1K a month. I am just curious which would provide the most in tax benefits for me.

 

[vi edit]

This is more of a CPA question.

There's more tax consideration than just your own. If you pay your mother, does she lose any retirement benefits(social security)? Plus since she has income she is going to have to pay in taxes on that maybe making things more difficult for her.

Just something to keep in mind.

I'm no help on the other stuff. There are some loopholes you can probably manipulate, but you aren't banking enough cash to really take/use a lot of them.

 

[xochi]

I'm not a CPA

But if i were in that situation, you buy the townhouse, rent it to your mother in lieu of child care payments, deduct townhouse expenses/repairs from your taxes. have mother do paperwork to be a registered home care provider so you can get a child care tax credit for child care you really didnt pay for.

note: the IRS will cross check income for your mother to see if she reported the child care income you didnt pay her! but when she does her taxes she can deduct food/educational "toys" for your child as part of her child care business.

Profit? or IRS Fraud?

 

[Codewiz]

Originally posted by: xochi
I'm not a CPA

But if i were in that situation, you buy the townhouse, rent it to your mother in lieu of child care payments, deduct townhouse expenses/repairs from your taxes. have mother do paperwork to be a registered home care provider so you can get a child care tax credit for child care you really didnt pay for.

note: the IRS will cross check income for your mother to see if she reported the child care income you didnt pay her! but when she does her taxes she can deduct food/educational "toys" for your child as part of her child care business.

Profit? or IRS Fraud?

Considering I lose my job on the fraud aspect or even the appearance of fraud. I want it all to be above board

 

[Descartes]

Passing money back and forth isn't going to help you any, so I'm not sure what you're going to accomplish there. Unless I'm missing something, if you did buy the townhouse and paid her you would:

1) Deduct the amount possible for payment to your mother. I don't know the exact amount, but it's all published here (warning: PDF).

2) Receive the same amount back as "rent" for the townhouse. You'd then have to claim this as income, less any deductions you might have for the property.

So, it would really be a wash and it would complicate your tax situation, imo. You need to just run through the numbers and see which deduction is better for you, the property or payment to your mother. I'm guessing it would be the former.

[edit]Also, as vi pointed out, this doesn't discuss the complications to your mother for receiving the income. I'd just buy the townhouse and leave it at that.[/edit]

 

[ponyo]

You've to pay tax and so will she. It's not worth the hassle IMO.

I would just buy the townhouse and let her live for free or buy it for her in her name and give her the money to pay for it. You can give her 12k a year tax free as a gift.

 

[Codewiz]

"Passing money back and forth isn't going to help you any, so I'm not sure what you're going to accomplish there. Unless I'm missing something, if you did buy the townhouse and paid her you would: "

Well for me to maintain an LLC you have to show the potential to make money. If I am letting someone stay rent free, it isn't going to pass the test. So paying her for childcare then her paying me for rent does solve that issue.

However looking over the IRS gift rules, it appears giving her 12,000 a year and having her pay me rent would probably be the best. Instead of paying her for childcare.

 

[vi edit]

Originally posted by: Naustica
You've to pay tax and so will she. It's not worth the hassle IMO.

I would just buy the townhouse and let her live for free or buy it for her in her name and give her the money to pay for it. You can give her 12k a year tax free as a gift.

That's kind of what I was thinking. There just isn't enough money being floated around to make any of the hassle worth any potential savings.

Am I correct in that second residences are excluded from the home interest deduction? So there are diminishing tax advantages to buying a second home for that purpose?

 

[Codewiz]

Originally posted by: vi_edit

Originally posted by: Naustica
You've to pay tax and so will she. It's not worth the hassle IMO.

I would just buy the townhouse and let her live for free or buy it for her in her name and give her the money to pay for it. You can give her 12k a year tax free as a gift.

That's kind of what I was thinking. There just isn't enough money being floated around to make any of the hassle worth any potential savings.

Am I correct in that second residences are excluded from the home interest deduction? So there are diminishing tax advantages to buying a second home for that purpose?

Yes but under an LLC, I can write off certain expenses and depreciated value for the townhome. That will give me considerable tax benefits.

The problem is making the LLC viable by federal standards. It means my mom has to give me money for rent. So how can I accomplish that without creating any deductions from her income.

I believe the gifting her money could work.

 

[CPA]

Originally posted by: Codewiz

Originally posted by: vi_edit

Originally posted by: Naustica
You've to pay tax and so will she. It's not worth the hassle IMO.

I would just buy the townhouse and let her live for free or buy it for her in her name and give her the money to pay for it. You can give her 12k a year tax free as a gift.

That's kind of what I was thinking. There just isn't enough money being floated around to make any of the hassle worth any potential savings.

Am I correct in that second residences are excluded from the home interest deduction? So there are diminishing tax advantages to buying a second home for that purpose?

Yes but under an LLC, I can write off certain expenses and depreciated value for the townhome. That will give me considerable tax benefits.

The problem is making the LLC viable by federal standards. It means my mom has to give me money for rent. So how can I accomplish that without creating any deductions from her income.

I believe the gifting her money could work.

An LLC is not technically recognized by the IRS. There are not specific Federal LLC tax forms. So, when you file your income under the LLC, you do it as a Sole Proprietorship (Schedule C), a Corporation (Form 2210) or a Partnership (Schedule K). Here's the catch, though, you can only file as one of those 3 if your state allows you to form your LLC under one of those 3. For example, a state may allow an LLC to formed for a Corporation, but not a Sole Propreitor, or vice versa.

You really don't gain anything by forming an LLC for tax purposes. It is more intended on shielding you from personal liability from your vendors, customers and others in your business relationships.

 

[Codewiz]

Originally posted by: CPA

Originally posted by: Codewiz

Originally posted by: vi_edit

Originally posted by: Naustica
You've to pay tax and so will she. It's not worth the hassle IMO.

I would just buy the townhouse and let her live for free or buy it for her in her name and give her the money to pay for it. You can give her 12k a year tax free as a gift.

That's kind of what I was thinking. There just isn't enough money being floated around to make any of the hassle worth any potential savings.

Am I correct in that second residences are excluded from the home interest deduction? So there are diminishing tax advantages to buying a second home for that purpose?

Yes but under an LLC, I can write off certain expenses and depreciated value for the townhome. That will give me considerable tax benefits.

The problem is making the LLC viable by federal standards. It means my mom has to give me money for rent. So how can I accomplish that without creating any deductions from her income.

I believe the gifting her money could work.

An LLC is not technically recognized by the IRS. There are not specific Federal LLC tax forms. So, when you file your income under the LLC, you do it as a Sole Proprietorship (Schedule C), a Corporation (Form 2210) or a Partnership (Schedule K). Here's the catch, though, you can only file as one of those 3 if your state allows you to form your LLC under one of those 3. For example, a state may allow an LLC to formed for a Corporation, but not a Sole Propreitor, or vice versa.

You really don't gain anything by forming an LLC for tax purposes. It is more intended on shielding you from personal liability from your vendors, customers and others in your business relationships.

After my mother passes, I would be renting it out so it might make sense at that point.

So what you are saying though, is that forming an LLC doesn't gain me much right now. I could just form a sole proprietorship and get the benefits I am looking at. The question is really, will gifting money to a family member and her paying rent to me fly? It wouldn't be an 1 to 1 match in money and the money would change hands, I just wonder how that will be looked at.

 

[EagleKeeper]

You can gift up to 11+K/year without tax consequences.
Your wife can also do the same.

If you rent the house, you can deduct all the expenses on the place, including the utilities if you pay for them. You would have to declare the Fair Market Rental as income on your Schedule E.

You can also pay for child care - you just need to file with the providers ID.
That will get you the Child Care Credit.




For the mother:
She will have to provide the tax ID (SS) to you for you to claim the child care credit.
She will have to claim the income paid to her for child care.

Now:
She can start a child care business in the place she lives in.
That will allow her to deduct some of the costs of the location and any "equipment" used in the child care facility.

 

[Ns1]

Originally posted by: Codewiz

Originally posted by: CPA

Originally posted by: Codewiz

Originally posted by: vi_edit

Originally posted by: Naustica
You've to pay tax and so will she. It's not worth the hassle IMO.

I would just buy the townhouse and let her live for free or buy it for her in her name and give her the money to pay for it. You can give her 12k a year tax free as a gift.

That's kind of what I was thinking. There just isn't enough money being floated around to make any of the hassle worth any potential savings.

Am I correct in that second residences are excluded from the home interest deduction? So there are diminishing tax advantages to buying a second home for that purpose?

Yes but under an LLC, I can write off certain expenses and depreciated value for the townhome. That will give me considerable tax benefits.

The problem is making the LLC viable by federal standards. It means my mom has to give me money for rent. So how can I accomplish that without creating any deductions from her income.

I believe the gifting her money could work.

An LLC is not technically recognized by the IRS. There are not specific Federal LLC tax forms. So, when you file your income under the LLC, you do it as a Sole Proprietorship (Schedule C), a Corporation (Form 2210) or a Partnership (Schedule K). Here's the catch, though, you can only file as one of those 3 if your state allows you to form your LLC under one of those 3. For example, a state may allow an LLC to formed for a Corporation, but not a Sole Propreitor, or vice versa.

You really don't gain anything by forming an LLC for tax purposes. It is more intended on shielding you from personal liability from your vendors, customers and others in your business relationships.

After my mother passes, I would be renting it out so it might make sense at that point.

So what you are saying though, is that forming an LLC doesn't gain me much right now. I could just form a sole proprietorship and get the benefits I am looking at. The question is really, will gifting money to a family member and her paying rent to me fly? It wouldn't be an 1 to 1 match in money and the money would change hands, I just wonder how that will be looked at.

Also, don't forget that if you're in CA (not sure about other states), there's a MINIMUM 800 LLC fee (it's really a tax, but they call it a fee)

 

[EagleKeeper]

Originally posted by: Ns1

Originally posted by: Codewiz

Originally posted by: CPA

Originally posted by: Codewiz

Originally posted by: vi_edit

Originally posted by: Naustica
You've to pay tax and so will she. It's not worth the hassle IMO.

I would just buy the townhouse and let her live for free or buy it for her in her name and give her the money to pay for it. You can give her 12k a year tax free as a gift.

That's kind of what I was thinking. There just isn't enough money being floated around to make any of the hassle worth any potential savings.

Am I correct in that second residences are excluded from the home interest deduction? So there are diminishing tax advantages to buying a second home for that purpose?

Yes but under an LLC, I can write off certain expenses and depreciated value for the townhome. That will give me considerable tax benefits.

The problem is making the LLC viable by federal standards. It means my mom has to give me money for rent. So how can I accomplish that without creating any deductions from her income.

I believe the gifting her money could work.

An LLC is not technically recognized by the IRS. There are not specific Federal LLC tax forms. So, when you file your income under the LLC, you do it as a Sole Proprietorship (Schedule C), a Corporation (Form 2210) or a Partnership (Schedule K). Here's the catch, though, you can only file as one of those 3 if your state allows you to form your LLC under one of those 3. For example, a state may allow an LLC to formed for a Corporation, but not a Sole Propreitor, or vice versa.

You really don't gain anything by forming an LLC for tax purposes. It is more intended on shielding you from personal liability from your vendors, customers and others in your business relationships.

After my mother passes, I would be renting it out so it might make sense at that point.

So what you are saying though, is that forming an LLC doesn't gain me much right now. I could just form a sole proprietorship and get the benefits I am looking at. The question is really, will gifting money to a family member and her paying rent to me fly? It wouldn't be an 1 to 1 match in money and the money would change hands, I just wonder how that will be looked at.

Also, don't forget that if you're in CA (not sure about other states), there's a MINIMUM 800 LLC fee (it's really a tax, but they call it a fee)

Cross the state line and save a few hundred dollars - Register in NV

 

[JS80]

No point in doing an LLC unless you think there's a chance your mom would sue you.