Wednesday, May 8, 2013


Do you have a teen-age dependent that will soon be looking for a summer job?

Frequently, unless you prepare your child’s tax return yourself, the cost of preparing a short form for a dependent child with an a summer job, solely for the purpose of getting a refund of the federal and state income tax withheld, is more than the amount of the refund.

Before starting his/her job your son/daughter will be given a Form W-4 to fill out.  Line 7 of the W-4 allows an employee to claim exemption from federal and state income tax withholding, if he/she had no income tax liability for 2012 and does not anticipate earning enough to pay income tax for 2013, by writing the word “EXEMPT” in the box indicated.

Writing “EXEMPT” on the form means that the employer will withhold only FICA (Social Security and Medicare) and any required state unemployment and/or disability taxes from the student’s wages.

For 2013, the federal standard deduction for a dependent with a W-2 is the greater of $1,000 or the sum of $350 and the dependent's earned income, not to exceed $6,100 (plus $1,450 if age 65 or blind). The state amount varies, and may be more of less than $6,100.

If you do not anticipate that your son/daughter will earn more than $6,100 during 2013, including up to $350 in interest, dividends and capital gains, have him/her claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal or state income tax return simply to get a refund of the income tax withheld.
If your son/daughter has already filled out a Form W-4 for his summer employer, but has not begun work yet, have him/her fill out a new one claimint EXEMPT to give to the employer before starting work.

Of course, on the other hand, and if you will be preparing your son/daughters simple tax returns yourself, you can have him/her use unnecessary federal and state income tax withholding as a form of “forced savings”, so he/she does not urinate away all of his/her summer earnings.

And while we are talking about summer jobs, If your son or daughter has one you should consider opening up a Roth IRA account for him or her.

You can contribute 100% of your child’s earnings to the account, up to a maximum of $5,500.  If your son earns $2,400 this summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,000 you can contribute $5,500.

There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.

There is no tax deduction for contributing to a Roth IRA, but most teenagers don’t need the deduction. Qualified distributions from a Roth will be exempt from federal, and probably state, income tax (assuming, of course, that the idiots in Congress don’t change the law in the future).

You can use a Roth IRA to encourage your children to work or to save.  If your son earns $5,000 in a part-time job, open a Roth IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a Roth, match it and put in another $2,500.

If you put the maximum into a Roth each year for your 16-year-old from 2013 through 2018, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.

A warning - there exists a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”


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