Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
TELLING TIPS: Before the W-2s arrive, talk to your kids, and tell them not to file yet. They may want their refund, but if they file and claim themselves, you may be a big loser.
You are allowed to claim a child as a dependent if they lived with you for more than half a year, was under age 19, or was a full time student for five full months and under age 24. Many kids worked part-time or during the summer and will now receive their W-2.
What happens on your return? You could lose a multiple of things including the loss of the College Educational Credit of $1,500 and the loss of the American Opportunity Credit of $1,000, if your student is in college. In addition, as your tax bracket is higher than your child’s, the loss of the $3,700 dependency exemption is worth more to you — maybe $500.
What should you do? Both you and your child should prepare your tax returns both ways and see what the difference would be. And then give that $271 (in this example) to your child.
However, what happens if your income is in a higher tax bracket, and you receive no benefit from claiming your student as a dependent? If your child has unearned income, like interest, dividends, or capital gains, and other income, it may pay for you not to claim a dependent exemption (Tax law says that if the child is eligible to be claimed by the parents, even though they elect not to claim them, the child is not eligible for their own personal exemption of $3,700). However, the student would be eligible for the educational credits, be in the lower 10 or 15 percent tax bracket, and have a zero percent capital gains rate.
So what happens if your child files and doesn’t tell you? Both of you will receive a ‘love’ note from the IRS stating that only one tax return can claim the personal exemption and that an amended tax return needs to be filed. This will cause you aggravation, and the cost of the preparation of the amended tax return.
The answer: Talk with your child as an adult and work together so that the winner isn’t the IRS.
Have a good week.
One last thought: The trouble with today’s taxes is that they keep your take-home pay from ever getting there.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.