Financial Q&A: Tips to Pay Less Tax or Get a Bigger Refund

Laura answers tax questions from readers, listeners, followers, and group members that will help you understand how to pay less tax, defer it, or to boost your tax refund and save more money every year.

Laura Adams, MBA
11-minute read
Episode #434

Question #2: Penny from my Dominate Your Dollars private Facebook group says, “Can you use a kid’s chore money to fund a Roth IRA on his or her behalf?”


This is a common question because the rules for contributing to a traditional or a Roth IRA say that you can have one at any age. So it seems like a child could qualify for an IRA if they earn an allowance, have baby-sitting income, or get cash gifts from grandparents on holidays.

But it’s not quite that simple because the IRS says you must have taxable compensation during the year to qualify for an IRA. That means you have to prove it by being employed and receiving a W-2 or by filing taxes on business income. You can’t double-dip by not paying tax on income to begin with and also sheltering it from additional tax inside an IRA.

If a child provides services like baby-sitting, mowing lawns, or doing household chores, that qualifies him or her as being self-employed. But you have to report their net earnings by filing Form 1040 and submitting either Schedule C or Schedule C-EZ. Plus, if a child has over $400 in net earnings, you must also pay the self-employment tax by submitting Schedule SE.

So, you’re going to need to keep careful records about revenue and expenses for each job that a child has and pay tax on his or her net profit. For instance, if a child makes $2,000 this year moving lawns for neighbors, and pays $300 to service the lawnmower, her net earnings are $1,700. If they are properly reported, she would be eligible to contribute up to $1,700 in either a traditional or a Roth IRA this year.

Let’s say your son earns $3,000 working a summer job as a bus boy in a restaurant. As long as his W-2 reflects that income, he’s eligible to contribute up to $3,000 in an IRA.  

But what if he spends all the money or wants to save it to buy a car? His money doesn’t have to be used to fund the account. As long as a child has taxable earned income, you (or anyone else) can fund an IRA that’s in your child’s name on his behalf.

As long as a child has taxable earned income you (or anyone else) can fund an IRA that’s in your child’s name on his behalf.

However, you can’t contribute more than his actual earnings, which is $3,000 for the year in my last example—even though the maximum IRA contribution for 2016 is $5,500.

Not all investment companies allow minors to open up an IRA—but don’t let that stop you because there are plenty that do, including:

Question #3: Mark says, “I have a new health savings account (HSA) and will max it out this year, in addition to fully funding my retirement accounts. But I rarely have medical expenses, so should I just treat the HSA like another tax-advantaged retirement account? Also, can I make a prior year contribution for 2015, even though the account wasn’t open until 2016?”


I like the way Mark is thinking because he’s making the most of every tax-advantaged account he can get his hands on!

The beauty of an HSA is that you can use it to pay for qualified medical expenses on a tax-free basis—but you never have to spend the money. That’s right; you can max it out every year and the growing balance simply rolls over from year to year without penalty.

Unlike a flexible spending arrangement (FSA), there’s no deadline to spend the money in an HSA. Even if you cancel your high deductible health plan (which is a requirement to open up and contribute to an HSA), you can still use HSA money indefinitely to pay for medical expenses tax-free.

Just be sure that you won’t need to tap the account, because if you spend HSA money on anything other than qualified medical expenses, and you’re younger than age 65, you must pay income tax plus an additional 20% penalty on the amounts.

If you’re like Mark and anticipate still having funds in an HSA in the future, that’s fine because it morphs into something like a retirement account. After you turn 65 you can spend HSA money for non-medical expenses without penalty. However, you do have to pay ordinary income tax on those amounts, which is similar how it works when you take distributions from a traditional IRA in retirement.

So the answer to Mark’s question is that treating an HSA like a retirement account is that it's a great strategy. It’s there for you if you have medical expenses, but you’re not penalized if you don’t use it.

When you initially open the account, you can only make contributions for the current year, not a prior one. Plus, you can’t use HSA funds to pay for a medical expense you incurred before the account was officially open. For instance, if you open and fund an HSA in January 2016, you can’t use the money to pay for a medical procedure that you had in the fall of 2015.

For 2016, if you have a high deductible health plan, you can contribute up to $3,350 to an HSA for an individual policy, or up to $6,650 if you have a family policy. If you’re over age 55, you can contribute an additional $1,000 to an HSA when you have either type of health plan.

See also: How to Save Money on Healthcare with an HSA


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlersbook is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.