Dear Carrie, My daughter is 16 and has her first paying job. Does she need to file a separate tax return? —A Reader
Dear Reader, congratulations to your daughter — and to you. A first job is an important milestone for both kids and parents. It's a step toward independence and personal responsibility for your daughter. And it's an opportunity for you to teach her some financial realities. And taxes are definitely a part of that financial reality.
Whether or not your daughter needs to file a separate tax return depends on three basic factors:
—Is she considered a dependent by the IRS?
—How much income does she have?
—What type of income does she have?
The IRS considers a child to be a dependent if he or she:
—Is under 19, or under age 24 and a full-time student, or permanently disabled at any age
—Lives with you more than 50 percent of the year
—Doesn't provide more than half of his or her own financial support
Next, you need to look at her income, both the amount and type.
A dependent who doesn't have unearned income only has to file a separate tax return if earned income is above — $6,350 for 2017. So if your daughter earned less than that, she wouldn't have to file.
But it could be a good idea to do it anyway. If her employer withheld federal income tax, she might be entitled to a refund. You don't want her to miss out on that. Plus, it's a good learning experience.
Unearned income is a different story. If a child has unearned income above $1,050 for 2017, a tax return is required. But when dealing with unearned income only, you can choose to either file a separate return for your child or include that income on your own return. One caveat: If you include it on your return, it could boost you into a higher tax bracket — and possibly higher tax rates.
The rules change again if a dependent has both earned and unearned income. In this case, you need to file a separate return if:
—Unearned income is more than $1,050.
—Earned income is more than $6,350.
—Combined income totals more than the larger of $1,050 or earned income (up to $6,000) plus $350.
All this can be a bit confusing, so unless your daughter's situation is fairly straightforward, I'd talk to your tax professional. Also check out IRS Publication 501 for a thorough treatment and worksheet.
You also should be aware of the different treatment of income reported on Forms W2 and 1099. If your daughter is considered an employee, her income will be reported on a W2 and subject to withholding. However, some employers prefer to hire part-time workers as contractors. On the plus side, nothing will be withheld. On the minus side, contractors who have net earnings (income minus expenses) of more than $400 will owe self-employment taxes, which basically cover Social Security and Medicare taxes. In this case, a contractor has to file a tax return even if no income taxes are owed. (IRS Publication 501 provides guidance).
You may have heard of the Kiddie Tax, so I think that's also worth a mention. This has to do with tax rates on unearned income.
Whether or not your daughter files a return, I'd definitely talk to her about taxes and withholding, and have her work with you as you prepare either hers or your own return.
Then take it beyond taxes and talk about responsible money management. Now that your daughter is earning her own money, help her create a budget so she can make the most of it. Have her keep track of her expenses, and perhaps suggest that she save a certain percentage of her paycheck each month for some future goal. If she hasn't done so already, help her open both checking and savings accounts and set up an automatic deposit from one to the other. Now that she has earned income, you might even help her open a Roth IRA.
Establishing good money habits early is incredibly important but, in general, kids don't learn much about managing money in school. It's up to you. So show her how you manage for both the short- and long-term. If you take it step-by-step, and include her where appropriate in your own money strategies, you'll set her on the path to being able to not only handle her taxes, but her financial future, as well.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at [email protected] The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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