When Your Child is the Next Big Thing
Gumbiner Savett Inc. manager, Lori Shrout recently had an article published in CPA Magazine regarding children and entertainment earnings. Living in Los Angeles, many families face this situation and can plan wisely for their little stars. Lori offers some great tips for you:
Many parents hope for that big break for their child. But what happens if your little star really is the next big thing? Most parents are unprepared for the financial responsibility that comes with their child’s success.
If you are the guardian overseeing your child’s finances, you are legally responsible for protecting those earnings until the child turns 18. The following are some important things to consider for your child’s entertainment earnings.
Open a Coogan Account
California is one of four states that currently require a blocked trust account (Coogan Account) to be established for minors working on entertainment projects. The Coogan law is a California state law named after 1920′s child actor Jackie Coogan. Like a lot of child actors, Coogan’s career was over by the time he turned 21. According to the law at the time, his earnings belonged to his parents, so he had no access to the significant monies he had earned during his career.
Currently, the Coogan law states that the money earned by minors working on entertainment projects belongs solely to the children themselves, and not to their guardian or business representatives. The law requires you to open the Coogan account and supply the employer with the account number. The employer will then withhold and deposit 15% of the pay directly into this account, which cannot be accessed until the child turns 18.
Keeping records for the myriad of expenses you will have is going to be tedious, but necessary. Your child’s pay will be reduced for agent fees, manager fees, taxes, and the mandatory Coogan account deposit. Luckily, your child’s pay stub will keep a running tally of these items for you.
You will need to separately document other expenses, such as:
- Acting classes & workshops
- Union membership dues
- Demo tapes
- Professional publications
- Mailing Expenses
- Parking Expenses
- Travel expenses to and from auditions or to the actual job (including lodging if you need to stay overnight)
- Maintain a log of all miles driven
You also need to consider who is actually paying these expenses. These items are often paid for by the parent, but the child is the one earning the income. The income related to these expenses will be reported on the child’s return, and the expenses need to be taken against that income. The problem here is that the rules dictate that a taxpayer (in this case, the child) cannot deduct expenses that were paid for by somebody else. What to do? You may want to consider having the child reimburse you for these expenses out of their earnings.
If you do choose to have the child reimburse you, consider maintaining these records until after your child reaches adulthood. These expenses are likely to be significant over time, and you want to be able to show your child why there is X amount of dollars left instead of XX amount of dollars once they reach 18. It may not be an issue with your family, but if it comes up, then having detailed records will make the conversation easier.
The other option here is to gift your child the money each year, so the expenses do not ultimately deplete the earnings that are accumulating and are still technically being paid by the child.
Considering Paying Mom or Dad
If your child becomes very successful, you may want to consider if Mom, or Dad, gets paid if they are acting as the manager and deserve a fee. While paying the manager fee will be a valid expense against the child’s income, the person receiving the fee will have to report the income. This ultimately shifts where the income is reported, on the parent’s return instead of the child’s, so both sides will have to be analyzed to see if this strategy will have the desired effect.
If Mom and Dad are in a higher tax bracket, this may not be the best way to reduce the overall tax burden. But if your little star is making more than the parents, this is something to consider. There are pros and cons to this scenario, and you will want to take the time to discuss this with a tax professional.
A child or dependent is required to file a tax return if they have earned income in excess of $12,200, or unearned income in excess of $1,100 for the 2019 year. Earned income is money earned from working, such as payments for acting, or residuals for previous acting jobs. Unearned income includes items such as interest, dividends, or capital gains. You may want to consider filing a return even if your child has not met these thresholds, to recoup any taxes that were withheld.
If your child has unearned income of $2,200 or over, then they may be subject to “kiddie tax”. These taxes are for any unearned income in excess of $2,200 at the tax rates used for trusts and estates, which are typically a higher rate than normal individual tax rates. Earned income is not subject to the kiddie tax.
As you can see, getting your child discovered will be just the beginning of the journey. One way to start is to make sure your financial advisor has experience dealing with the entertainment industry.