Tax considerations when you hire your child, Don't let an extra bedroom cause you to lose sleep, When a SIMPLE plan may be the wrong choice, How nonspouse beneficiaries must take IRA payouts
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QI've hired my 16-year-old daughter to be the receptionist at my office on Saturday mornings. I expect she'll earn about $2,500 for the year. What's the tax situation?
A A dependent child is taxed on earnings from employment but gets a standard deduction for them. The deduction, which is claimed by the parents, equals the earnings plus $250, but not more than $4,550 in 2001. However, if your daughter has more than $250 of dividend and interest income, her wages are subject to withholding even if she won't owe any tax, and she'll have to file for a refund.
Because she's older than 14, the kiddie tax rules don't apply. If your practice is unincorporated, you won't have to pay Social Security, Medicare, or federal unemployment tax on her wages. That won't bar your retirement plan from covering her, if it permits underage part-timers to participate. In any case, she can open an IRA for herself. A Roth account is probably preferable, since the tax deduction for a contribution to a traditional IRA is unlikely to be of any use.
QI contribute part of my annual salary to my employer's 401(k) plan. I also earn about $15,000 from freelance writing on health subjects. Can I set up a SIMPLE plan for myself, in addition to the 401(k)?
A Yes. Because your writing income is independent of your other employment, doing so wouldn't violate the rule that bars a business from having a SIMPLE plan (Savings Incentive Match Plan for Employees) if it has another kind as well. Regardless of how many separate businesses you have, though, you can't defer more than $10,500 in compensation this year. (The limit will rise to $11,000 next year). So if you put $6,500 of your $15,000 income into your SIMPLE plan (the maximum for 2001; for 2002, it's $7,000), you can defer only $4,000 of your salary from employment.
To get around the $10,500 limit, you might instead set up a Keogh plan, such as a money-purchase plan, for your independent business. Since this isn't a salary-deferral plan, you could contribute roughly $3,000 to it and still put $10,500 into the 401(k), for a total of $13,500.
QI was glad to learn from the article "Your nest egg just got bigger" (April 9, 2001) that new IRS rules reduce the distributions I have to take from my IRAs when I turn 70 1/2, even if my spouse isn't the beneficiary. But I'm still confused about how a non-spouse beneficiary would be affected. Does it matter whether I die before or after my mandatory withdrawals have started?
A Not if you've designated someone as your beneficiary. Then his or her life expectancy determines the minimum required distributions from the balance in your account.
If you don't name a beneficiary and you die after mandatory withdrawals have begun, whoever inherits the IRA must take minimum distributions based on your remaining life expectancy as though you were still living. If you die before your withdrawals begin, the heir has five years to clean out the account.
QThe owner of a house I'd like to buy admits that he added a fourth bedroom without getting a permit from the city. What problems could arise if I apply for a permit after I take title?
A One possibility: The city might deny the permit and force you to tear down the structure if a municipal ordinance forbids its construction. That threat lowers the house's value. A less drastic potential problem is that the city could raise the assessment on the property after you receive the permit. Point out these drawbacks to the seller, and make your purchase contingent on his obtaining a permit.
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to email@example.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management.