If your kids are wrapping up a summer job and heading back to school, they’ve probably had a few painful experiences with Uncle Sam and our complicated tax laws.
Face it, no one, especially novice workers, really enjoys seeing the gap in their paycheck between gross income and net income. Then there are all the nuances associated with the paperwork — filling out a W-4, handling tips, and keeping track of baby-sitting and lawn-mowing jobs and related expenses, to name just a few.
The tax lessons won’t necessarily end with the last paycheck of the summer, especially since many kids will shift from full time to part time during the school year.
Any laxness in following the rules can lead to a lot of aggravation and disappointment for both young workers and parents come January when income-tax filing season begins.
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For young workers, the number to keep in mind is $6,300. That’s the standard deduction for single taxpayers. A youth, who’s considered a dependent for tax purposes, can earn up to that amount in 2016 and not have to file an income tax return.
That’s the good news.
From there it can get complicated. For example, if your youngster generated unearned income from investments of more than $1,050 this year but did not have any earned income, a tax return will be required. And a child who has earned and unearned income during the year might have to file, based on Internal Revenue Service guidelines.
And don’t forget state income taxes, said Ann Swarts, a managing director at CBIZ MHM in Kansas City. “Don’t assume your child is exempt” from filing a state tax return even if the federal is not required, Swarts said. Check state income tax rules and requirements.
Here are some other tax tips that apply to young workers and parents too:
▪ Cash tips. If your teen worked as a waiter or bus boy, for example, tips were probably a big part of the summer income. All tip income is taxable. Swarts recommends that workers keep a ledger documenting cash tips received daily, and if they haven’t already, try to reconstruct that information.
▪ Odd jobs. Lawn-mowing, baby-sitting, pet care. Many teens string together odd jobs and are considered self-employed. Though they might not make enough to pay income tax, they might be required to pay self-employment tax if they earned $400 or more and are 18 and older. Self-employment taxes cover future Social Security and Medicare benefits.
Also, document your expenses for things such as mileage, gasoline and mower repairs. Some of these costs might be deductible.
▪ Employing your children. The Rubin Brown accounting firm in St. Louis noted that if you hired your child for the summer — and your business was unincorporated— you can deduct their pay, and other tax benefits might apply. However, your child must have performed actual work and been paid a fair wage.
In these types of family business situations, the child also is not subject to payroll taxes if he or she is under age 18.
▪ Special tax breaks. For example, food and lodging allowances paid to ROTC students are not taxable. However, active duty pay — including summer advanced camps — is taxable, according to an Internal Revenue Service bulletin.
▪ Open a retirement account. Swarts recommends using your child’s hard-earned summer money to fund either a Roth IRA or a traditional IRA. You can contribute earned income up to $5,500 to either investment. Assets in the accounts grow tax-free.
However, there are some significant differences between the two retirement accounts. While contributions to a traditional IRA are tax deductible, withdrawals are taxable. On the other hand, Roth contributions aren’t deductible, but withdrawals are generally tax-free. There is no age restriction for opening a retirement account, and parents can even contribute the money up to the eligible amount.
Steve Rosen: 816-234-4879