Tax Bites: No More (Tax) Hassles With Your Kids
KAthleen S. Vaccaro, EA
February 20, 2017
Some good news to share... and not just the Patriots victory! Brian Besse, CPA, has joined our tax team. He is new to us, but not new to tax and accounting. In fact, he spent the last 29 years as a manufacturing company CFO, as well as maintaining a small tax practice. Read more about Brian in our Team Spotlight near the end of this newsletter.
Some deadline changes to share... for businesses, trusts and LLCs that file a separate tax return. The IRS has CHANGED many of these 2016 filing deadlines. For example, partnerships and some LLCs are now due one month earlier in March instead of April, while calendar year C-Corporations are due in April instead of March. Luckily we have a good tracking system!
These changes do not impact IRS Form 1040 - the individual tax return - even if you have a business or rental property reported as part of your individual taxes. The 1040 deadline still comes in mid-April... Tuesday April 18, 2017, to be exact!
Read on for this month's tax tip about how to avoid tax hassles with your 14- to 24-year-old's employment.
Regards,
Kathleen S. Vaccaro, EA
Goldberg & Vaccaro Tax Services LLC
No More (Tax) Hassles With Your Kids
When my youngest son Tom turned 14, he started feeling the financial pinch and got a job. He was excited.
Market Basket!
His own blue apron!
Personalized name tag!
Money to burn!
Then came his first day. It was summer. It was warm. His shift lasted four (!!) hours, schlepping carts in the blazing midday sun. He came dragging in as if he had spent the day in the coal mines.
The scene repeated itself several times that week, but then... a big moment... his first paycheck! Now we're talking!
But wait! What's this?! Withholding?!! Taxes!?!! ARE YOU KIDDING ME?!
Welcome to my world, his father said.
You forgot to claim EXEMPT, his mother said.
If your child is still a dependent and will earn less than $6,350 this year as a W2 employee, you can save yourself (and your dependent child) some time and hassle by having them claim EXEMPT before they receive their first paycheck.
In most cases, your child earning $6,350 or less will owe no income tax and will NOT have to file a tax return.
In the case of the unfortunate Tom, he ended up with $10.42 federal and $9.35 state income taxes withheld before he got things straightened out with the Market Basket payroll department.
That's a total of $19.77 that he overpaid in taxes... too much for a 14-year-old to leave on the table.
So then he (actually "we") had to wait until the following tax season, then file federal and state income tax returns just to get this money back from the IRS and Mass Department of Revenue.
If he had claimed EXEMPT from the beginning, he would have already had the $19.77 in his pocket (or more likely in Pizza World's pocket) without having to file any tax returns at all.
When they fill out the W-4 heading into their new job, your children should be sure to claim EXEMPT so that NO federal or state withholding comes out of their paycheck. (Please note: This doesn't eliminate Social Security and Medicare tax withholding, which is a straight 7.65% for all employees, even grocery store newbies. And, as Tom was appalled to learn, you don't get it back.)
Two exceptions to this general piece of advice:
If your dependent child has investment income more than $1,050, which includes not only interest and dividends but also stock sales, then they may have to pay taxes even though they earn less than $6,350.
If your child will receive a 1099 instead of a W2 it means he or she is considered self-employed. In that case a whole other set of rules applies, including a filing requirement for earnings as low as $400.
Bottom line for your children is that it's almost always better to be paid as a W2 employee (and claim EXEMPT) rather than as a 1099 subcontractor, the details of which we will get into another day.
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Team Spotlight
Brian Besse came on board last month as our Tax Manager, following an early career as a CPA in public accounting, then a 29-year stint as the CFO of a Boston manufacturing firm. Brian brings years of practical business experience as well as a friendly manner to the Goldberg & Vaccaro tax team. He will be working closely with Steve and me on corporate and individual tax returns, and will be getting to know many of you during the coming months.
We are told that Brian's true passion is playing in a "vintage" baseball league following the 1860's rules, although he has yet to show up to the office in his "vintage" baseball knickers. Brian lives on the North Shore and spends as much time as possible with his two young adult sons, Andy and Ben.
Crazy but True - Claiming Dependents!
For the typical taxpayer (25% tax bracket), claiming your child as a dependent can save you more than $1,000 in taxes. (If the college tax credits are involved, it could be more than $3,500.)
Here's the crazy part: For some people (especially higher income married couples), the "tax savings" from claiming your child might only be $51. Not even enough to cover this week's grocery bill!
About Us
Goldberg & Vaccaro Tax Services LLC specializes in tax preparation and accounting services for individuals and small business owners.
Please give us a call if we can help you:
PHONE: 978-663-4537
FAX: 617-488-2270
EMAIL: Office@goldbergtax.com