What is considered income / ROTH IRA

[mrpaseo]

One of my Soldiers will be leaving the service in 2009, he will then be going abroad to Russia to learn the language. He will be gone for half of 2010 and will continue his education when he returns. That said, he might not have income from an employer, however.... His father will be building a barn and will pay his son (My Soldier) for the labor he does while he lives at home and attends college.

My question is this, can he invest this money in a ROTH IRA if he claims it as income on his taxes?

Thanks for your time,
Ray

[maat55]

Yes, he can claim up to 5k as long as he has reported income to match.

[edit] Eligibility

[edit] Income limits
As with many tools that offer tax advantages, Congress has limited who can contribute to a Roth IRA, based upon income. A taxpayer can only contribute the maximum amount listed at the top of the page if their Modified Adjusted Gross Income (MAGI) is below a certain level (the bottom of the range shown below). Otherwise, a phase-out of allowed contributions runs throughout the MAGI ranges shown below. Once MAGI hits the top of the range, no contribution is allowed at all. The ranges, for 2007, are:

Single filers: Up to $99,000 (to qualify for a full contribution); $99,000-$114,000 (to be eligible for a partial contribution)
Joint filers: Up to $156,000 (to qualify for a full contribution); $156,000-$166,000 (to be eligible for a partial contribution)
Married filing separately (if the couple lived together for any part of the year): $0 (to qualify for a full contribution); $0-$10,000 (to be eligible for a partial contribution).
The lower number represents the point at which the taxpayer is no longer allowed to contribute the maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to contribute at all. Note that people who are married and living together, but who file separately, are only allowed to contribute a relatively small amount.

However, once a Roth IRA is established, the balance in the account remains tax-sheltered, even if the taxpayer's income rises above the threshold. (The thresholds are just for annual eligibility to contribute, not for eligibility to maintain an account.)

The ranges for 2008 are:

Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)
Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution)
< JP AGI for 2008

To be eligible, you must meet the earned income minimum requirement. In order to make a contribution, you must have taxable compensation (not taxable income from investments). If you make only $2000 in taxable compensation, your maximum IRA contribution is $2000.

[mrpaseo]

I understand the contribution limits, my question is, can his parents pay him $10,000 for labor rendered building the barn (Were talking a house sized barn) that he claims as income for tax purposes and then, invest 5,000 of that money in his ROTH IRA?

Thanks,
Ray

[sweeps]

Yes, but he will owe self-employment taxes on the income.

[MonkeyMama]

ANything you report as "Earned income" is considered income for the purpose of a ROTH.

If someone paid a young teen to babysit, and they reported the income, technically they can fund a ROTH.

(Or if a young child is a model earning income, etc.)

[mrpaseo]

Great, now does he have to register as self-employed or does he just do it, then tell the tax man at tax time that he earned X amount of dollars and he did it self employed at which time the tax guy pulls out the correct tax forms and files the correct numbers to report it correctly...lol.

Thanks again for all your help,
Ray

[MonkeyMama]

Just file the taxes at tax time.

Brings up a good point though. Since it is not a paycheck where payroll taxes are withheld, would probably need to pay in estimated taxes.

General rule is to pay 100% of last year's total tax liability, and you will not be penalized by paying the rest (even if it is substantial) on April 15th. The rule is 110% for higher AGIs (just as a FYI thing to other readers). The states vary.

If he has a tax man I would call him and relay the situation for specific advice.

May be smart just to fund the ROTH and pay a percentage to the government, when he receives it, so it doesn't get spent.

[maat55]

I understand the contribution limits, my question is, can his parents pay him $10,000 for labor rendered building the barn (Were talking a house sized barn) that he claims as income for tax purposes and then, invest 5,000 of that money in his ROTH IRA?

Thanks,
Ray

Maybe I should have bolded the whole sentence:

To be eligible, you must meet the earned income minimum requirement. In order to make a contribution, you must have taxable compensation (not taxable income from investments). If you make only $2000 in taxable compensation, your maximum IRA contribution is $2000.

Your parents will have to give him an 1099(January 2009) and he will have to report it on an schedule C or E, I think C. He will also need to pay in around 25% for that quarter on an 1040 estimated tax voucher.

The eligibility for the roth only needs the 1099, paying the estimated tax with an voucher is to advoid penalties and interest from the IRS.

[mrpaseo]

Sorry Maat55, I did not mean to sound rude.

[maat55]

Sorry Maat55, I did not mean to sound rude.

I as an self-employed service provider, report my income under the proceedure, I stated above. I'm questioning whether the father has to provide an 1099. There has to be a form or proceedure for establishing that the earnings are legit. And paying estimated tax on the 10k is needed, I think. (I have to do this) The father not being an business entity, has me confused. Hopefully, someone can come behind and clean this up for you.

[mrpaseo]

There has to be a form or procedure for establishing that the earnings are legit. The father not being a business entity, has me confused.

This is what brought me to this site originally; my original response to him was that they would think his parents just gave him the money. His argument was what if I mowed lawns for a living and I was good at it, I earned 5,000 in one season from mowing 10 lawns per week... how do I claim that money?

I said...good point; let me bring this to the table.

And so here I am,
Thank you all for your advice,
Ray

[disneysteve]

Your parents will have to give him an 1099

I'm questioning whether the father has to provide an 1099.

I do not believe there needs to be a 1099. There just has to be a record of the work and the income. Keep a log of the time on the job. Have father pay by check, not in cash. Keep copies of the checks and a record of the bank deposits of those checks. That should be sufficient.

I report self-employment income each year that I do not get a 1099 for. For example, I report my survey income. I keep a list of the surveys and total payment amounts from each company for the year. I only get a 1099 if I do more than $600 worth of surveys for one company, but there are several companies for which I don't pass that threshold.

The lawn mowing comparison is a good one. If I go around and mow lawns for a dozen different customers, they aren't all going to give me 1099s at the end of the year. I just need to document that I did the work and received the pay.

Don't forget that he can deduct any related expenses he incurs - buying tools, other equipment, etc.

[maat55]

It would not hurt to present a statement for services to your father for the earnings recieved. In my business, I write out a bill for my services. Just because these transactions could throw up a red flag for the IRS, I would have him sign the bills as recieved and paid by check no#.

[MonkeyMama]

Individuals do not issue 1099s.

Individuals can pay you to do work; they don't have to report it.

As long as work is done, it is okay. The IRS generally does not mind you reporting income (even if you put it in a ROTH).

A statement may be a good idea just to have records. But it really isn't that big of a deal. They aren't generally going to complain if you report income.