Tax Strategy for College Tuition Savings

January 1st, 2022 at 8:12 PM

The tax code says, “The term ‘net earnings from self-employment’ means the gross income derived by an individual from any trade or business carried on by such individual \"

The Supreme Court ruled that to be in a trade or business, you need to be involved with continuity and regularity and that a sporadic activity does not qualify.

In Batok (T.C. Memo 1992-727), the court ruled that John Batok’s installation of windows did not rise to the level of a trade or business. Mr. Batok’s activity, although engaged in for profit, was neither continuous nor regular. He had never installed windows before this effort nor at any time after that.

The court ruled that Mr. Batok’s activity was a “one-time job” not subject to self-employment taxes.

The one-time project can avoid having your child on the payroll, and it can give you the best of all worlds.

For example, say you are in the 40 percent federal bracket, and you pay your 20-year-old college student $23,225. You deduct the $23,225 and save $9,290 on your taxes.

Your child pays $1,028 in taxes.

Mark S. Fineberg, CPA