FYI - THE NEW KIDDIE TAX

Under the GOP Tax Act, effective with tax year 2018 the “Kiddie Tax” is no longer calculated based on the parent’s income, and the income of siblings is also no longer a part of the calculation.

The “old” law added a child’s “excess” net investment to the net taxable income of the parent(s) when calculating the tax, and the income of all dependent children was taken into consideration in the calculation.

I must point out - there is no change to the Kiddie Tax for the 2017 tax return that will be prepared in the next few months.  The 2017 Kiddie Tax is calculated in the same way as the 2016 Kiddie Tax.

And a reminder - the Kiddie Tax applies, in 2017 and 2018, to dependents who are a full-time college student under age 24.

The Earned Income – W-2 income and net earnings from self-employment - of a dependent “child” subject to the Kiddie Tax is taxed at the Single tax rates.  Net unearned income – basically investment income - in excess of $2,100 is taxed using the tax rates for Estates and Trusts.

Here is the new tax rate schedule for 2018 for Estates and Trusts -

If taxable income is = the tax is:

Not over $2,550 = 10%

Over $2,550 but not over $9,150 = $255 plus 24% of the excess over $2,550

Over $9,150 but not over $12,500 = $1,839 plus 35% of the excess over $9,150

Over $12,500 = $3,100.50 plus 37% of the excess over $12,500

While this initially appears to result in higher taxes on the “excess” investment income of dependent children, like what you’re liable to read in the Bible, it ain’t necessarily so.  It depends on the amount of income subject to the kiddie tax and the parents' tax bracket.

This change does, however, somewhat simplify the calculation of the Kiddie Tax, which, as a tax preparer, has always been a bit of a PITA in the past, especially when the income of several dependent children was involved.

TTFN

A TIMELY PRE-SUMMER TIP

Now is a good time to refer you to a TWTP post from last year titled - GETTING READY FOR SUMMER – FILLING OUT FORM W-4 FOR A SUMMER JOB.

As you read the post substitute 2014 for 2013, and 2013 for 2014.  For 2014 the Standard Deduction for a dependent is the greater of $1,000 or the dependent's earned income plus $350, not to exceed $6,200 (plus $1,550 if blind).  And the maximum IRA contribution remains at $5,500.

A recent IRS Tax Tip release (“Information for Students Who Take a Summer Job”) provided a good reminder for dependents who will be working as waitpersons or bus persons –

“Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.”

TTFN

“SUMMER” RERUN - DEPENDENTS AND INCOME TAX WITHHOLDING

{The post has been updated to include the 2012 standard deduction numbers – rdf}

Often times the cost of preparing a short form for a dependent child with an after-school or summer job, solely for the purpose of getting a refund of the in-come tax withheld, is more than the amount of the refund.

Before starting a job, a student is 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 2011 and does not anticipate earning enough to pay income tax for 2012, 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 2012, the federal standard deduction for a dependent with a W-2 is the greater of $950 or the sum of $300 and the dependent's earned income, not to exceed $5,950 (plus $1,450 if age 65 or blind). The state amount varies, and may be more of less than $5,950.

If a dependent student with a summer job does not expect to earn more than $5,950 during 2012, including up to $300.00 in interest, dividends and capital gains, the child should claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal income tax return simply to get a refund of the income tax withheld.

TTFN

SOME ADVICE FOR PREPARING YOUR 2007 TAX RETURN

As the beginning of the tax filing season, which in my opinion is February 1st, quickly approaches I thought I would remind you of some previously offered tax preparation advice from January 2007:

CHECK OUT ALL YOUR OPTIONS -

When preparing your tax return you are often given choices on how to treat a certain situation or item. You should review each option and do separate tax calculations to see which one will result in the lowest tax. You should also consider how the federal option will affect your resident and non-resident state and local tax returns. Your goal is to choose the options that will allow you to pay the absolute least amount of combined overall federal, state and local income taxes.

One of the options for a married couple to consider is whether to file joint or separate returns. You can check out my postings “Joint or Separate – That is the Question, Part I and Part II” for some guidance.

DON’T BE IN SUCH A HURRY –

You should not rush to be among the first taxpayers of the year to have your taxes done. Do not give or send your tax preparer your ‘stuff’, or attempt to prepare your own returns, until you have received all the forms and information needed to complete the returns! That means every W-2, every 1099, and every K-1 and all the cost basis information on the sale of investments. I have had many experiences where a client came in very early in the season and had his/her return prepared, only to receive another Form 1099 in the mail the day after he/she had sent the finished returns off to his/her “uncles”.

If you have a brokerage account there is an excellent chance that you will receive at least one, if not two, corrected “Consolidated 1099 Statements” to report taxable dividends, interest and gross proceeds after the initial statement arrives in late January. This is because of the rules concerning the taxation of “qualified” dividends, which became effective with tax year 2004. The final corrected 1099 may not arrive until mid-March.

BUT DON’T WAIT UNTIL THE LAST MINUTE –

Many taxpayers who expect to owe their “uncles” wait until the very last minute to get their “stuff” together to prepare their return. Even if you owe taxes on your 2007 return(s) you should have the return prepared early, once you have all the necessary information in hand. You don’t have to actually file the returns and pay the tax until April 15th. But by having your 1040 prepared early you will know exactly how much you will owe and have over a month to come up with the money, instead of running around trying to juggle funds days before the deadline. Hey, you might even be surprised to find that you will be getting a refund!

Also consider the workload of your tax preparer. I have a strict long-standing rule that all returns that are not literally in my hands, with all the necessary information, by March 31st will be automatically extended!

IDENTIFYING IRA CONTRIBUTIONS –

When making your IRA contribution by mail make sure you clearly identify the tax year to which you want the contribution applied. If making a contribution in early 2008 for tax year 2007 write “2007 IRA contribution” clearly in the memo section of the check. If you are enclosing a payment voucher or coupon provided by the trustee make sure that the correct tax year is marked. Follow up by checking your next IRA account statement to verify that the contribution was applied to the proper year. If you find that the contribution was applied to the wrong tax year contact the trustee immediately.

Now also seems like a good time to remind you of some advice if you have dependent children who will be working part-time after school or in the summer this year:

DEPENDENTS AND INCOME TAX WITHHOLDING –

If a dependent student with an after-school or summer job does not expect to earn more than $5,450.00 (the standard deduction for Single) during 2008, including up to $300.00 in interest, dividends and capital gains, the child should claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal income tax return simply to get a refund of the income tax withheld.

Now here is some advice from someone else. Madison, a new “visitor” to THE WANDERING TAX PRO from the MyBlogLog community, has a good way of making sure she does not miss anything when getting ready to prepare her tax returns in the post “Organize & Prepare: Do Your Taxes Quickly” at her blog MY DOLLAR PLAN. The only thing I do not agree with is “Once I know I have all the forms and all the data is correct, I can quickly enter the information in Tax Cut”.

TTFN