You may at first think hiring your child or children may not be worth it because you might lose the dependency exemption. Not so. Each person in a family entitles the family to a $2,150 automatic exemption on its tax return just for being alive. Husband and wife each provide an exemption and neither is considered a dependent. Children or others you support are considered dependents. In general, you are entitled to take the $2,150 dependency deduction as long as you provide more than 50% of the dependent’s income for the year and the dependent’s income is under $2,150.
When you hire your child as shown in the previous strategy, you keep the tax exemption of $2,150 even though you are taking the tax deductions for salaries paid. You have effectively doubled the tax deductions you get for each child, allowing you to raise your children on tax deductible dollars.
There is an exception for your children who are full-time students or living at home and who are under the age of 19. You may claim the dependency exemption for your children in this category regardless of their income. No formulas, no tests, no limits.