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Ask the tax adviser

Tax Talk with George SaenzLegal fees for administering an estate and how to hire minor children for a family day-care business.

Estate legal fees

Dear Tax Talk:
I am the executor of my father's estate and paid over $10,000 in legal fees. Is this deductible from my federal taxes?
Black Ram

Dear Black Ram:
Legal fees paid in connection with the settlement of an estate are deductible either by the estate on its Form 1041 or by the residual beneficiary or beneficiaries on Form 1040 Schedule A, line 22, if the estate is not required to file a tax return.

Unfortunately, the executor can only claim the deduction if he is a residual beneficiary. A residual beneficiary is the one who gets the remainder of the estate after specific bequests are paid.

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Hiring your kids

Dear Tax Talk:
My son and his wife operate a group home day-care center. They have heard that they could pay "wages" to their minor children (ages 4 and 6) for chores performed and that these wages could be deducted as a business expense. Anything to this?

Thank you.

Dear Conrad:
You heard right. Wages paid to minor children by an unincorporated parent's business are not subject to employment taxes (FICA, Medicare or Federal Unemployment Tax) and are deductible by the parent on Schedule C. You need to check the rules out for your state's unemployment tax.

Further, a child gets a standard deduction up to $4,300 or an amount equal to their earned income, whichever is less. Therefore, two kids wouldn't pay tax on $8,600, which the parent deducts. Also the wages would qualify the children for IRAs so that's another $4,000 that could avoid tax. This is a pretty good deal. And as in all good deals, the IRS would scrutinize the transaction to make sure it's genuine.

First of all, since your grandchildren are only 4 and 6, you have to be able to justify what is paid to them and for what duties. You may be able to claim the kids entertain the day-care children for a certain number of hours each day at an hourly rate that is reasonable (say $6 to $10 an hour). Keep track of the hours they work as you would for any other employee. Also, I am not an expert on labor laws, but make sure you are not violating any by employing such young children.

Lastly, I believe you would need to report the kids' wages on Form 941 (Employer's Quarterly Tax Return), Form 940 (Federal Unemployment Tax Return) and file Forms W-2 and W-3 in January. Since their wages are exempt, I think you need to indicate on the forms that the payments are to minor children of the employer.

And don't forget to do income tax returns for the kids.


-- Posted Sept. 1, 2000

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