Calling on all tax gurus

dogonmoon · July 28, 2007, 1:42pm

For 2007, My D (rising HS senior) will have around $10,000 income earned from work. Since this is her first income earned from work, I am very lost in terms of how to handle this income for tax returns.

– Should she file her own tax return? or should I include this income in my return? She has been my dependant all her life. Which option will be more beneficial to us?

– I am a single parent with 2 dependants (this HS D and a college kid)

– She had to relocate herself to another state to work one of her jobs. She attended school while there staying at school dorm and paying for room and board. She incurred other expenses (trips,…) as well from that job. Can any of these expense be claimed against her income?

I would appreciate any help.

wisteria · July 28, 2007, 1:53pm

If her income comes from her work, there is no choice. She will need to file her own return.

You should NOT include her income on your return. Earned income should always be reported on the tax return of the person who earned it.

(Unearned income, e.g., from investments, is sometimes reported on the parents’ return, but earned income ALWAYS goes on the return of the person who earned it.)

I assume her employers are witholding taxes from her paychecks. Check the stubs and figure out how much will be deducted total this year. With an income around $10,000 (all from work), a student will likely owe Federal taxes of about $500. If her Federal income tax witholdings will add up to more than that, she’ll get a refund next year. If they are less than $500, she may owe the government next year.

Depending on the amount of income earned out of state, she may need to file state returns in both the other state and your home state. (In that case, she may be able to take a credit for taxes paid to the other state against taxes due to your home state.) State taxes can be complicated when more than one state is involved. If you’re lucky, one or both states will not have an income tax.

Also: it’s extremely unlikely that her travel and temporary living expenses for one of her jobs will have any tax benefits for her. Even if the expenses qualified as an itemized deduction, it’s not likely that they would add up to more than her standard deduction, which in her case would be $5,150.

<a href=“http://www.irs.gov/publications/p501/ar02.html#d0e6153[/url]”>http://www.irs.gov/publications/p501/ar02.html#d0e6153</a>

WashDad · July 28, 2007, 1:53pm

I am not a tax accountant or attorney. You will get your best information from a professional. I have worked as a self-employed consultant, though, and have a little experience. If you want a real answer, pay someone for a little of their time – it won’t take much.

<ol>
<li> She has to file her own return. It’s her income, not yours.</li>
<li> The question is who declares her as a dependent. Given her low income, I would think you would get more benefit than your daughter from the deduction, as long as you are contributing enough to still justify claiming her as a dependent.</li>
<li> Travel expenses incurred while either self-employed or for the benefit of your employer are generally deductible. This is an area where you should consult an expert. If the cost of these business trips is less than the standard deduction, don’t bother. Moving out of state to take a job is not in and of itself deductible, except that moving costs can be deducted. If she “moved” by sticking things in the back of a Toyota, I doubt the moving expenses are worth worrying about.</li>
</ol>

My overall opinion is that she should file a return, let you claim the deduction, and pay her taxes, which will be very small on that income.

wisteria · July 28, 2007, 2:25pm

I agree with WashDad that a professional can be helpful. However, you need to be careful; anyone can hang out a shingle as a “professional tax preparer,” and they also make mistakes. Tax law is complicated and it’s easy to make mistakes.

Tax lawyers and CPAs are expensive and generally specialize in more complicated business returns. One professional credential to look for is “EA,” which is short for IRS Enrolled Agent. An EA has passed an IRS certification test and must regularly recertify to stay up-to-date with tax changes. Many EAs are former IRS employees with a lot of experience.

It’s also good to arm yourself and your daughter with some information ahead of time. It’s likely she filled out some tax forms when she started her job (a W-4 and possibly state forms as well) and those were probably somewhat mysterious. The deductions on her paycheck stub are probably mysterious as well.

The IRS has an on-line tutorial designed for high school students which might help demystify some of that for both of you.

<a href=“Understanding Taxes”>Understanding Taxes;

Both of you will be better equipped to make sense of professional tax advice if you do some advance study.

dogonmoon · July 28, 2007, 2:29pm

Sincere thanks to wisteria and WashDad!

I got it. It is her income and she has to file.

When I filled out her tax withholding form, I picked 0 withholding since she didn’t have any tax liability in the past and I didn’t think she will for this year. I will change that now since it looks like she will have some for this year.

jmmom · July 28, 2007, 2:40pm

Not a tax aspect of this, but re her “other expenses (trips)” from that out-of-state job… Do you mean that she had travel expenses in connection with doing her job such as driving her own auto on an overnight business trip (not to and from her home or temporary home) or driving her own auto to a conference or to a branch office of her company?

These types of things would be business expenses that her company might reimburse her for via her submitting an expense report. Sometimes young people on their first (or summer) job aren’t aware that they can get reimbursement. Sometimes the company assumes the young employee knows s/he can be reimbursed for such out-of-pocket expenses but the employee had no idea. And sometimes such expenses are so minimal that it’s not worth checking into.

wisteria · July 28, 2007, 2:48pm

WashDad raised the question of whether dogonmoon can still claim her daughter as a dependent.

As long as the daughter does not provide more than 50% of her own support, she still meets the support test to qualify as dogonmoon’s dependent.

(Note that dogonmoon does NOT have to provide more than 50% of the support to claim her daughter! What is required is that the daughter must not provide more than 50% of her own support. )

To determine this, add up the support provided by everyone (daughter, dogonmoon, possibly support provided by other relatives like a non-custodial parent or grandparents, etc.) and as long as daughter does not pay more than 50% of the total, dogonmoon can claim her.

Also, note that the entire earnings of $10,000 does NOT count as support provided by the daughter. Only the amounts the daughter pays towards items considered support (e.g., food, clothing, housing, transportation, entertainment, etc.) would be included in this calculation.

If dogonmoon’s daughter is putting money into a savings account for the future, that money going into savings does NOT count as money she is providing for her own support in determining this year’s dependency status.

Example: dogonmoon’s daughter earned $10,000 and spent $3,000 on food, clothing, entertainment, transportation, etc., spent $1,000 on FICA and income taxes, and put $6,000 into savings. Only the $3,000 would count as support provided by the daughter in the calculation for determining whether she provided more than 50% of her total support.

emeraldkity4 · July 28, 2007, 2:57pm

wisteria gives good advice

I also have been using tax software to make it much easier to file taxes as it automatically checks for appropriate forms-

I will also remind( for in the future) that when filling out income tax forms- work study income has to be reported, but when filling out FAFSA, that income is reported but then deducted from income evaluated for aid.

dogonmoon · July 28, 2007, 3:13pm

wisteria, You sounds like a tax professional. Based on your criteria, I definitely can claim her as my dependant. Her room and board expense was automatically deducted from her paychecks, other than that I cover everything. Any remaining from her pay checks went to her savings account for her future college expense.

dogonmoon · July 28, 2007, 4:41pm

emeraldkity4, you are right. I wouldn’t do returns without tax software and it will come handy again with my D’s next year.

jmmom, thanks for the explanation. Her expense was not business expense. Her travels were between her work state and home state.

Thanks all.

great_lakes_mom · July 28, 2007, 7:06pm

Thanks for this, as it touches on something I have been wondering about. My new college grad, whom I supported through his final semester ending in May, is going off to teach in Asia. He will have some income from his domestic summer job, and then foreign income. Unless the rule has changed in recent years, he will not have to pay US taxes on his foreign earnings. But, can I claim him as a dependant for this year? He’s self supporting for only part of 2007, and his US earnings will be quite low.

I’m sure others have similar questions regarding new college grads.

thumper1 · July 28, 2007, 7:29pm

No choice. If she earned the income SHE has to file a tax return. Also, if she worked in more than one state, you may need to file returns in more than one state. It depends on the state policy. My kid worked in three states last year. He had to file federal income tax (including income from all the jobs), and then file state taxes for three states (required by all three). One was his state of residence and for that one he filed a resident return. For the other two, he had to file a non-resident return. I will tell you, we used Turbo Tax to do these. Because his income was not very high, one state was actually free (they participate in the e-file program for low income). The other we paid for. But I can tell you…the non-resident form was difficult and I was happy to have Turbo tax fill in the blanks for me.

bookworm · July 28, 2007, 7:41pm

I use an accountant. Definiely have dtr file own form, but she is still your dependent. This is the time to have her begin a ROTH IRA. I too have to go thru the hassle of filing non-resident out of state tax forms.

I’m not good enough to trust myself with tax software.

TooRichForAid · July 28, 2007, 8:09pm

A few years back, I caught a few problems with the tax software, I called and asked for my money back and they did give me the refund. But in general, tax software is pretty easy to use. I’m going to ask my D to do one herself this year.

dogonmoon · July 28, 2007, 8:17pm

When My D files her own tax return, can she use standard deduction on hers while I am claiming her as my dependant? I use itemized deduction on mine.

Great Lakes Mom,

check out wisteria’s earlier posting to see that answers your question.

bookworm,

Thanks for mentioning the IRA stuff. It is a great idea and worth looking into.

Thanks thumper1 for your insight.

thisoldman · July 28, 2007, 8:33pm

The tax programs are very good. The programs give me ideas to save money in taxes, ways to invest to minimize taxes, and ways to not to do that will cause taxes is well worth the $20 for a program. The computer tax programs has literally paid for his college education of $100,000+. The programs will give you hints, alerts, and forward tax information for the next year that a live person just will not do unless you know what to ask. Preparers are pretty much hacks who must work their butts off in 2 -3 months to cram as many forms and clients into a limited timer frame. The programs work just for me and no one else. Just because you use a preparer does not mean that the preparer is correct vis-a-vis IRS. Our DS has a complicated tax situation, (US student in Canada with TA wage) for which he paid $1500 for US preparation. IRS finds an error in the preparation and refunds $500. CPA has no idea how this refund is derived.

wisteria · July 29, 2007, 12:13am

The rules on US taxation of foreign earnings have indeed changed in recent years. The qualification to exclude foreign earnings from US taxable income are much stricter than they used to be. Your son can use this IRS webpage to determine if he qualifies for the foreign income exclusion:

<a href=“http://www.irs.gov/businesses/small/international/article/0,,id=96822,00.html[/url]”>http://www.irs.gov/businesses/small/international/article/0,,id=96822,00.html</a>

As far as whether you can claim him as your qualifying child dependent, that’s more complicated than for dogonmoon. There are four criteria for determining whether a child is a “qualifying child” for dependency status: relationship, age, residence, and support.

Relationship is straightforward for you, because he is your son.

If your son is under 24 and was a fulltime student for at least five months of 2007, he will meet the age test. (If under 19, then he doesn’t need to be a student at all to qualify.)

There is also a residency issue. Parents can only claim a deduction for a qualifying child if that child lives with them for more than half of the year. However, a child can be considered to live with their parent even if he is away from home temporarily (e.g., living in a college dorm, or at a summer program, or on a temporary visit to relatives.) It’s a rather complicated issue in some cases to determine what constitutes a “temporary” absence, because it has to do with intent to return home.

Here’s more information on the IRS definition of “qualifying child”:

<a href=“http://www.irs.gov/newsroom/article/0,,id=133298,00.html[/url]”>http://www.irs.gov/newsroom/article/0,,id=133298,00.html</a>

ellemenope · July 29, 2007, 7:44am

I also qualify anything I say with the caveat that I am not a tax professional. But I do have a daughter in college who earned money at summer/campus jobs and she does file fed tax forms.

You don’t have to file a tax form if you make less than a certain amount of $$, but you may choose to do so if $$ was withheld and you can get it back by filing a form.

D files 1040EZ, which you can fill online and then print out.

You can look at the instructions for line 5 on page 2 of the form to answer your question. But basically, it looks like she can take the standard deduction but not the exemption.

I, too, use the tax software every year.

3bm103 · July 29, 2007, 9:29am

Your daughter can take the standard deduction on her return while you itemize on yours. She may not, however, take her personal exemption since you are taking her on yours.

The Foreign Earned Income Exclusion is pretty complicated and I wouldn’t attempt it on my own. At least not the first year. Find a qualified tax professional who has dealt with this issue before. It’s not just a matter of earning it overseas, but meeting the criteria for excluding it.

great_lakes_mom · July 29, 2007, 2:59pm

3bm103 and Wisteria, thanks! Come to the midwest, I’ll owe you a dinner! The rules are fairly definitive on that page link, and I found other pages dealing with fine points of the rules. As long as he stays away long enough, 330 days, he can claim that exclusion. There are other criteria as well, though are fairly simple to follow. I think. It seems I can claim him as a deduction as well, based on that last semester in college as well as this summer.

As I’m also a devotee of Turbo Tax, will see whether the advanced edition might cover these issues. Living where I do, finding a tax preparer skilled in these fine points of international living might be tricky or quite expensive, as it may be in China as well.

Calling on all tax gurus

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