It is the child who is actively engaged in the search for an income, not the parent. And although child actors are entitled to use the same deductions as any adult actor, just like every adult actor they must be able to prove the expenses were paid out of their own pocket.
We prepare returns for child actors as well as adults. Sometimes explaining the rules to parents who have invested in their child’s careers conflicts with what they may have heard “on the street” from other parents. The most difficult concept for some to accept is that the deductions are only allowed for the child to use against the child’s income; the parents are not permitted to use the expenses on their own personal return at all.
The parent is not engaged in the business and therefore it is not the parent who is allowed to take the business deductions on their return. The parent is allowed to write off any expense they may incur if the child compensates them for the expenditure out of the child’s income (therefore they, the parent, would have income to show against the costs they are writing off). But the amount of the deductions would be limited to the amount of the income.
So what happens when the income of a child doesn’t come close to the investment of their parents? Then, for obvious reasons, it is a natural inclination of the parents to want to deduct the costs on their own return; but this isn’t allowed. When the parents try to do this on their return you will probably see the IRS examiner make use of the “Hobby/Loss Rule” which limits the expenses to the level of the income.
Even then, it is the child who is actively engaged in the search for an income, not the parent. And although child actors are entitled to use the same deductions as any adult actor, just like every adult actor they must be able to prove the expenses were paid out of their own pocket. An adult actor can’t simply take the receipts paid for by someone else and include them on their own return. In an audit the IRS will want to see proof that the expenses were paid for through the income of the person claiming the expenses.
One option, that was indicated above, is for the parents to keep track of the expenses and consider them a loan for when the child finally shows an income sufficient to pay them back.
But when a parent has incurred hundreds, if not thousands of dollars of costs it is admittedly difficult to suggest they retain the receipts and records for those costs until a later year when, hopefully, the child can pay them back from their income.
What further complicates the issue is that in California, New York, Louisiana and New Mexico the states demand that a portion of the income be set aside for the child in an escrow account, commonly referred to as a Coogan Account. So after the agent/manger fees have been paid, the state and federal taxes have been withheld and the Coogan amount in California has been set aside (see below), quite frequently there is insufficient income left over to pay the remaining expenses of pursuing a career.
Additionally parents should bear in mind that as long as the child shows less income from W-2 sources than the standard deduction ($6,300 in 2016) they don’t actually need to show any expenses to get all the withholding back.
Here are the basic rules regarding a child’s tax returns. A child performer must file a personal return if they make less than the standard deduction ($6,300 in 2016) and they want any withholding refunded to them. In those cases they will receive all of the income taxes withheld during the year.
If they are paid in cash (which includes checks and 1099-MISC) and the income is greater than $400 they must also file a tax return to establish any self-employment taxes they may have incurred from their profit.
When a child makes more than the standard deduction they have to file a return to show they have had a sufficient amount of withholding kept out of their checks. That usually requires being able to prove whatever deductions the child may have for their career.
We urge all parents to carefully document all of the expenses made on behalf of their children and keep those receipts until your child comes of age. As exciting it may be to help your child create a career in this industry, being able to have a positive and lifelong relationship with your child should be every parent’s goal. We have all heard the stories of child actors who find out the money they anticipated being available to them as young adults is significantly less than they expected. The harsh reality of the industry is that while it may be a slim number of actors, young or old, that sees significant success, youngsters become young adults with expectations of someday having access to all of the money that they assume has been saved for their future. As the parent of these children it’s a good idea to be able to document all of the expenses.
As we grew up from our childhood most of us lost some privileges of our youth. It’s just a part of being a kid. Jackie Coogan lost a great deal more than most of us will ever know.
Coogan was a well-known child star in silent films (and was later best known as “Uncle Fester” on the 1960’s TV show, “The Addams Family). As a child actor he earned millions of dollars (it is estimated Coogan brought in between $3 to $4 million. When adjusted for 2012 dollars that would be $48 million to $65 million!) Unfortunately, because of selfish and irresponsible parents, when he came of age he was forced to sue his parents to acquire his income and all that he was able to recover under the laws at that time was a little more than $100,000 that remained of his earnings that had not been squandered. The California 'Coogan Law' was enacted in 1939 to protect child entertainers from similar financial abuse.
Thanks to the Coogan Act (SB 1162); every time young performers work under an entertainment contract, 15% of their gross earnings are set-aside for them until they reach legal majority. Under the California Coogan Act (SB 1162), whenever a child actor or athlete works under contract, employers are required to deposit 15% of gross earnings directly into a Coogan Blocked Trust Account that has been set up in the minor’s name. These earnings are the legal property of the minor and monies placed in trust cannot be touched by anyone until the minor turns 18 or becomes legally emancipated. All thanks to “Uncle Fester.”
Parents or Legal Guardians are required to establish a “Coogan Account” within seven business days after a minor’s employment contract is signed, and to provide the minor’s employer with a copy of a trustee’s statement (evidencing proof of the account) within ten business days after the start of employment.
Recent amendments to the Coogan Law were passed to better ensure that a sufficient portion of a child's earnings under specific entertainment, sports and similar contracts is set aside in trust and preserved for the child's future.
Are 'Coogan Accounts' set up in California also acceptable in New York?
Yes. As long as the Child Performer Trust account meets the standards required by a New York State UTMA (Uniform Transfer to Minors Act) Trust Account or a New York State UGMA (Uniform Gift to Minors Act) Trust account, it does not matter where the account is actually located.
The rules are simple:
A court order is no longer required to open a Coogan Account
The minor is the Beneficiary
The parent is the Trustee
No withdrawals are allowed until the minor turns 18, and
The Trustee may transfer funds to an equivalent account before that time
We urge you to further investigate some of these other websites which provide information of significant value to you if you are considering introducing your child into the entertainment industry.