Dear readers -- This week, a second batch of questions about Roth IRAs for kids, in response to my columns on that subject -- obviously a hot topic.Question -- How do you know that earning money for household chores is not sufficient to open a Roth IRA? If taking out the trash doesn't qualify, what about having your child perform special chores, such as stripping and staining a table or rotating the tires?
Answer -- In the absence of much formal guidance from the IRS on the question of household chores and IRAs, tax professionals are basing their advice on common sense, as well as on unofficial opinions from the IRS, with a bias toward being conservative.
I would say it would be stretching the definition of earned income to include money a child is paid for special but sporadic chores such as staining a table or rotating tires.
If you were going to employ your own child, it would be much better to do so on a more formal basis -- making the child an employee if you have your own business, for example, or paying him or her to do a steady job that you would otherwise pay someone else to do, such as extensive and regularly scheduled yard work (more than occasionally mowing the lawn).
Better still, your child should do yard work or babysitting for other families, in which case you can avoid the gray area of household chores.
Question -- You said that a teenager who mows lawns is probably not required to pay taxes or file a return. How do I find out if my grandchild must file to pay income taxes or Social Security if he earned around $2,000 mowing lawns and doing odd jobs for others?
Answer -- If that $2,000 was your grandson's only income, he doesn't owe income tax. In tax year 1999 a dependent child could have earned up to $4,300 from a job without having to file a return (that figure rises with inflation).
However, because your grandson earned more than $400 from self-employment, he would be subject to the 15.3 percent Social Security tax -- especially if he wants to open a Roth IRA.
Question -- My daughter is 16 years old and has a job. However, her earnings are under $2,000. Can she still contribute $2,000 to a Roth or does the contribution have to equal her earned income?
Answer -- Sorry, but your daughter can't contribute the full $2,000 to a Roth. She can contribute only as much as her actual earned income.
Have a question about kids and finances for Dr. Tightwad? Write to Dr. T at 1729 H St., N.W., Washington, D.C. 20006. Or send the good doctor an e-mail message (and any other questions for this column) to jbodnar@kiplinger.com.