The Legal Tax Hack High-Income Families Use (But Rarely Talk About)

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What if I told you that you could legally reduce your family’s total tax bill—not by making more money or finding some exotic loophole—but by repositioning income within your family?

That’s the power of income shifting.

By distributing income to family members in lower tax brackets, you can minimize your tax burden and keep more wealth growing inside your household.

Let’s break down three time-tested income-shifting strategies that savvy families (and their advisors) use:
✅ Family partnerships
✅ Kiddie tax-aware strategies
✅ Income-splitting with trusts

1. Family Partnerships: Turn Your Household Into a Tax-Efficient Business

Have a family business or side hustle? You may be sitting on a golden opportunity to shift income.

Family limited partnerships (FLPs) or LLCs allow you to allocate income to family members who are actively involved—or even those with ownership interests.

Here’s how it works:

• You create an entity (LLC or LP) for your business or investment holdings.

• You assign ownership interests to your spouse or adult children.

• Profits from the entity are distributed in proportion to ownership—so if your child owns 20%, they get 20% of the income.

Why it works:

Because your 18-year-old daughter in college probably isn’t in the 37% tax bracket. That income gets taxed at her rate, not yours.

Pro tip:

This strategy works best when the income is passive (like rental or dividend income) and the family members are not minor children (more on that below).

2. Kiddie Tax: Know It, Navigate It, Work Around It

The IRS isn’t blind to this strategy—and the Kiddie Tax rules exist to limit shifting income to young children.

Here’s the gist:

• Unearned income (interest, dividends, capital gains) over $2,600 (2025 limit) for children under 19 (or 24 if full-time students) gets taxed at the parents’ marginal rate.

• Earned income (wages from a job) is NOT subject to Kiddie Tax and is taxed at the child’s rate.

Strategy:

• Hire your kids in your business. Pay them a fair wage for legitimate work (e.g., social media, admin, product packaging).

• That income is taxed at their rate, and your business gets a deduction.

• A child can earn up to $14,600 in 2025 before paying any federal income tax (standard deduction for single filers).

Example:

You pay your 15-year-old $10,000 to do part-time social media and admin for your LLC.

• You deduct the $10K from your taxable income (saving potentially $3,700+)

• Your child pays zero in federal income tax.

• You just shifted $10K from your bracket to theirs.

3. Income Splitting with Trusts: Build a Legacy, Not Just a Tax Shelter

For families with significant assets or multi-generational wealth goals, income-splitting trusts can be powerful.

Non-grantor trusts, like a complex trust or a family irrevocable trust, are separate tax entities. Income earned in the trust can either:

• Be taxed inside the trust (at compressed brackets), or

• Be distributed to beneficiaries, who pay tax at their own rates.

Why it works:

If you have a high-income household, and your adult children are in lower tax brackets, the trust can distribute investment income to them and reduce the overall tax burden.

Example:

A family irrevocable trust earns $50,000 in dividends.
You distribute $40,000 to two adult children in the 12% bracket.
Rather than being taxed at the top trust rate (37% on income over ~$15,000), that income gets taxed at their much lower individual rates.

Pro Tip:

This requires planning and ongoing trust administration. Work with a tax strategist and estate attorney to do this right.

Final Thoughts: Play Smart, Play Legal

Income shifting isn’t about loopholes or tricks.
It’s about using the tax code to your advantage—as it was written.

The tax code recognizes the family as a financial unit. When used wisely, strategies like income shifting can:

• Reduce total taxes

• Create teachable financial moments for your kids

• Build long-term, multi-generational wealth

Just don’t DIY this one. The IRS watches income transfers closely. Done right, these moves are totally legal. Done wrong, they can backfire fast.

Want help figuring out how income shifting could work for your family?

📩 Send me a message titled “Tax Game Plan” and I’ll share a free guide on how families can save thousands in taxes every year—without making a dollar more.

Let’s make your money work smarter, not harder. 💼💰

#FinancialLiteracy #TaxStrategy #FamilyFinance #MoneyCoach #IncomeShifting #GenerationalWealth #SmartMoneyMoves #FinancialPlanning

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