Monthly Archives: June 2016

Tax Tips for Students Working Summer Jobs!

A sign that reads: Summer Jobs

Summer jobs also bring tax responsibilities.

Well, well, well Summer is finally here. In addition to sun, beach, barbecues, and the end of school, summer provides a good opportunity for students to make some money. Along with establishing a good work ethic and building time and financial management skills, a summer job also means learning about the obligatory duty of paying taxes. Here are six tax tips for parents (and students) that I feel might be helpful for children working summer jobs:

1. Understand the Rules for Claiming Dependents

You may be wondering, since your child has a summer job, if you will still be able to claim him or her as a dependent on your own return. The answer is, “Yes.” A child under the age of 19 (or under the age of 24 and a full-time student) can make any amount of income and still be claimed as a dependent as long as you are still providing more than half their support. This includes food, shelter, clothing, entertainment, school expenses, vehicle expenses, etc. As “independent” as your child may feel now that they are taking on some responsibilities of their own, when you add up all of the expenses, it may be surprising to see how “dependent” working children still are on the support of their wonderful parents!

2. Filling Out Form W-4: Determine How Much To Withhold

Before your child begins a summer job, he or she will be required to fill out a federal Form W-4, and the equivalent state form, to instruct the employer how much to withhold for federal and state income taxes. To determine how much, if any, should be withheld, it is important to note the thresholds of when your child will need to file an income tax return. Estimate how much they will earn this summer based on their wages and expected hours to be worked. Regardless of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at the regular 6.2% and 1.45% rate and is never available for refund.

3. If No Taxes are Withheld, Set Money Aside to Be Prepared for Tax Time

Your child may have a summer job when the employer does not take your child on as an official employee, but, rather, as an independent contractor for their temporary summer work. In this instance, your child’s paycheck will not include any deductions for Social Security and Medicare tax, nor will there be any withholding for federal or state income tax. If $600 or more is earned from this employer, your child should receive a 1099-MISC at the end of the year. Most likely the income will be shown as “Non-employee Compensation” in box 7 of the 1099-MISC. This is treated as self-employment income and is subject to self-employment taxes. In this case, your child must file a return if earnings were at least $400. Be aware that because the employer did not withhold and pay any taxes on behalf of your child, taxes may be owed when tax returns are filed the following spring. It will be a good idea for your child to set aside money from each pay check so that he or she can pay the tax when the returns are filed.

4. Know the Tax Implications of Employing your Child

Many of you may be exploring the idea of hiring your child for the summer. Giving your child a summer job may provide an opportunity for tax savings for you as the employer as well as for your child. There are tax benefits of having your child as an employee if your trade or business is a sole proprietorship or partnership in which you and/or your spouse are the sole owners or partners.

Wages paid to your child who is under the age of 18 are not subject to Social Security and Medicare taxes, or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are not subject to FUTA. Your child’s wages are a deductible business expense to your company, as long as your child is treated as a regular employee, wages are paid in dollars, and a W-2 is filed.

According to Laura Saunders, in her article “Tax Dos and Don’ts for Hiring Your Child” at WSJ.com, a Tax Court judge in Washington disallowed a business owner from deducting $15,000 in wages to her three children ages 15, 11, and 8 who helped their mom with tasks such as stuffing envelopes.

The business owner’s method of payment was regularly expected parenting expenses such as food, lodging and tutoring services. In other words, you cannot use pizza as a form of payment to your employee-child and use the value as a business deduction for wages. The IRS recommends you pay your employee-child via paycheck and have him or her deposit it into his or her own bank account. This will verify that your child received the funds.

5. Understand How Taxes Work With an Out-Of-State Summer Job

If you reside in Illinois and your dependent child gets a summer job out-of-state, your child is considered an Illinois resident and will need to file an Illinois return based on Tip #2 above. If the job is in Iowa, Kentucky, Michigan, or Wisconsin, a reciprocal agreement exists with Illinois. What is a ‘Reciprocal Agreement’? I’m glad you asked. Reciprocal agreements allow residents of one state to work in a neighboring state while only paying income taxes to their state of residency. This simplifies tax time for people who live in one state, but work in another by requiring them to file only one state tax return.  If the state where you work and the state where you live have a reciprocal agreement, you are exempted from income taxes on any wages earned in the state where you work.  You only have to pay taxes to the state where you live.

OK, that’s Illinois but what about New York and the Tri-State area? Well, unfortunately New York, New Jersey, and Connecticut do not have a reciprocal agreement with each other.  This means, for example, if you work in New Jersey and live in New York, you would have to pay New Jersey income taxes as a nonresident and also pay New York income taxes as a resident since you live in New York.  However, residents of New York (and most other states) can take a tax credit for taxes paid to other jurisdictions. Tax rules differ from state to state so it is a good idea to do your homework and understand the income tax filing requirements for the employer’s state.

6. Understand Roth IRA Eligibility and Benefits

Something else to think about if your child gets a summer job is that he or she will be eligible to start making Roth IRA contributions. While retirement may seem like light years away for your newly working teen, the power of compounding is amazing. In addition, the contributions can be withdrawn tax-free and penalty-free at any age and the earlier they begin contributing, the greater the earnings potential. There is a lot to keep-in-mind as your child begins exploring summer job opportunities since the tax implications can be complex.

If your child will be working this summer, let Solid Tax Solutions put them on the right tax track as well as put your mind at ease. You can contact us at: (845) 344-1040. We are also online at: SolidTaxSolutions.com.

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Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

A Bill on the Senate Floor Would Require Presidential Candidates to Release Their Tax Return. Even Donald Trump!

There is no law that says that a Presidential candidate must release their individual tax returns to the public, but at least one member of Congress thinks there should be. Senate Finance Committee Ranking Member Ron Wyden (D-OR) has introduced a bill which would require presidential nominees to release recent tax returns.

Donald Trump signing his tax returns

A New Senate Bill Would Require ALL Major Party Presidential Nominees to Release Their Tax Returns.

The bill, called the Presidential Tax Transparency Act, would require a Presidential candidate to release the most recent three years of filed tax returns (I think that it should be a minimum of the most recent ten years of their filed tax returns; but I digress) to the Federal Election Commission (FEC) within 15 days of becoming the nominee at the party convention (I would like to see this apply to all Presidential candidates who throw their hat into the ring, not just nominees at the party convention). This bill, as currently written, would apply to ‘Major Party’ candidates (Per the Internal Revenue Code Section 9002(6) a ‘Major Party’ is actually defined as “a political party whose candidate for the office of President in the preceding presidential election received, as the candidate of such party, 25 percent or more of the total number of popular votes received by all candidates for such office”). If the candidate refuses to comply, the Treasury Secretary would provide the tax returns directly to the FEC for public release.

Hmm……..just let that last part sink in for a minute.

Sen. Wyden said, about the bill, “Since the days of Watergate, the American people have had an expectation that nominees to be the leader of the free world not hide their finances and personal tax returns.”

I happen to agree with him.

Sen. Wyden went on to say, “Tax returns deliver honest answers to key questions from the American public. Do you even pay taxes? Do you give to charity? Are you abusing tax loopholes at the expense of middle-class families? Are you keeping your money offshore? People have a right to know.”

I happen to agree with him on that, too.

When presumptive GOP nominee Donald Trump suggests that the public has no interest in what’s in a candidate’s tax returns, saying “there’s nothing to learn from them,” I disagree. I believe that there is much that can be learned from a person’s tax returns.

So, why the secrecy? Because a tax return is not just a bunch of numbers. It’s a snapshot of your financial life. Not only do you have a better understanding of where taxable income comes from (like Warren Buffett, I suspect much of Donald Trump’s income is tax favored), you can see potential failures in losses and worrisome positions with investments and loans. You also have a picture of what a taxpayer might find important. When it comes to taxpayers who itemize, you can learn about charitable deductions (not simply how much but where it’s distributed), real estate taxes (abatements, for example), real estate holdings and more. You can also gather information about the existence of offshore accounts, household employees and other holdings.

That’s why we tend to keep our own returns private – we don’t want our neighbors knowing our business. But Presidential candidates play by a different set of rules. We want to know what’s important to them, where their money is coming from, and whether they are linked to or beholden to other people or entities. Under the Ethics in Government Act and Federal Election Campaign Act, certain disclosures are required for candidates for federal office (as well as other high-ranking officials and staff). Those disclosures include information about income, gifts, assets, liabilities, outside employment, trusts, and more (downloads as a pdf).

I do think that Trump’s refusal to release any of his income tax returns sets a dangerous precedent. Once one candidate refuses, I think it will embolden future candidates to do the same. And I think that’s very bad for the process.

But, I also understand why he is refusing to make his tax returns public (even though I don’t agree with his refusal). I think it’s clear that once the returns are made public, they’ll be picked apart by Trump’s competitor(s) and by the voters he’s currently seeking; it’s the equivalent of millions of armchair auditors.

Trump has also said about his tax rate: “It’s none of your business.” Again, I disagree with him. Voters want to know as much as possible about their candidates. That’s why, since the 1970s, most presidential candidates have voluntarily released their tax returns to the public.

By the way, if you are interested, you can see an archive of candidate and presidential tax returns right here.

Compelling the release of those tax returns by statute will be interesting. Currently, we have incredibly strict privacy laws when it comes to our individual tax returns. Those privacy protections extend to all taxpayers  – even presidential candidates. I don’t see the value in changing those rules. Voluntary disclosures “should” be enough. But Donald Trump has shown that by not “volunteering” to release his tax returns that can lead to a very slippery slope for future elections.

To be clear, I don’t want a police state but neither do I want a President with secrets.

So stay tuned boys and girls.

If you are really ‘geeky’ you can read the text of this Senate bill here.

Do you think this bill has a chance? Is Donald Trump is concerned about this bill?

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Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).