It's hard to believe summer is almost over and kids are going back to school soon. Was your teenager excited about working this summer? Did you hear "OMG" when they got their paycheck and saw the amount of taxes withheld?
I know when my oldest child got his first job I considered how we were going to file his taxes and what it was going to do to mine! If your teen worked this summer, you may be wondering can you still claim them, do you have to put their income on your tax return, or even what child related tax credits you might lose because of their employment.
Many things change when our children start working, let's look at the tax impact since those are clearer and certainly more readily explainable than other changes with our teenagers.
At what age do you have to start filing a tax return? While there is no minimum age to start filing a tax return, there is a minimum filing requirement. Dependent children have to file a tax return if they earned income of more than $6,200. Keep in mind, that there are other filing requirements based on gross income, which include items such as dividends and interest.
Do I have to claim their income on my tax return? If your child is working or receiving income other than interest and dividends, they must file their own tax return. The taxes on their wages or self-employment taxes are based on their own tax rate, usually not more than 10 percent tax rate while the investment income is taxed at the same rate the parents pay.
Will my child owe taxes? All employees have taxes directly deducted from their paychecks. Employees are required to fill out a Form W-4 before beginning their job so their employer knows how much to withhold for federal and state income taxes. A good rule of thumb for your working child is to claim zero exemptions to ensure they have enough taxes withheld they don't owe money to the IRS come tax time. If income is low enough, your child should get all their income tax withholdings as a refund.
Can I still claim my working child as a dependent? Tax rules for a dependent child are different than any other type of dependent. Your dependent child can have any amount of income and still be claimed as a dependent as long as they do not provide more than half their own support. This includes gifts, entertainment, food, shelter, clothing, purchasing a vehicle, maintaining a vehicle, other forms of transportation and school expenses. If your child can be claimed as a dependent on your tax return, they cannot claim their own exemption. This is true even if you chose not to claim your child as a dependent on your own tax return.
Can I still claim the Child Tax Credit? Each dependent child under the age of 17 can qualify you for the $1,000 per child tax credit. The credit is available to you even if your child is working and paying taxes on their income. Unfortunately, the year your child turns 17 the tax credit is no longer available.
When is my child's tax return due? Even children have to file their tax return and pay their taxes by April 15.
Which forms should I use? If your dependent child has a job with a W-2 and no investment income, they can usually file Form 1040 EZ, Income Tax Return for Single and Joint Filers With No Dependents. Again, if your child has multiple sources of income or had their own business, the tax implications could be more tricky. You also need to make sure any state tax return is filed when the federal tax return is filed since many states charge a penalty for late filed returns, even when the filer is due a refund.
It is exciting to get that first real job and more so, the first paycheck for your teen and for you as you watch your child become part of the workforce. Unfortunately, becoming part of the workforce includes becoming part of the tax paying force.
Your working child can have an impact on your tax return. It may be good or not so good, either way it is important to know what impacts that income has on your tax situation. Be sure to consider the tax impact of your child working a summer job -the first time and every time. It could cause an underpayment of taxes by either you or your child or a lost refund if the return isn't filed. Either way, know the tax rules and pay no more in taxes than you should IRS Publication 501, Exemptions, Standard Deduction, and Filing Information is an excellent resource regarding dependents with earned income and filing requirements.