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.”
TTFN
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