financial bookkeeping tips for contractors

Should Your Child File Income Tax Forms This Year?

If your kids are growing up and earning their own money, you're probably wondering how this affects both your taxes and theirs. It's a good question, and here's what you need to know.

When Is a Child Required to File Taxes?

If you're claiming your child as a dependent on your taxes, they may still be required to file their own return. Generally, this is based on how much money they earn. In 2016, this threshold is $6,300 for most single dependents, no matter how young they are. If they receive Form 1099-MISC for work as an independent contractor, they generally must file if this income is more than $400.

However, even if the minor isn't obligated to file taxes, they may want to do so anyway. Why? If any federal income tax (Box 2 on Form W-2) was withheld from their paycheck during the year, filing is the only way to request a refund from the IRS. Likewise, state withholding may be refunded through filing income taxes with your state taxing authority.

What About Unearned Income?

The filing threshold for dependents with unearned income -- things like interest, dividends, annuities, awards or prizes, and Social Security benefits -- is lower. In 2016, it is $1,050. If your son or daughter has a combination of earned and unearned income, you may want to consult with a qualified accountant or tax preparer to determine if they are subject to taxes.

How Do They File as a Dependent?

If someone else is claiming a taxpayer as a dependent, the forms are the same when filing their own taxes. The child will choose a filing status that matches their situation. However, they will not check Box 6A on Form 1040, and will claim no personal exemptions on Line 42. They may still claim the standard or itemized deduction on Line 40.

Because a dependent cannot claim the personal exemption, they may find that their tax bill is higher (if they earn enough to be required to file).

How Does this Affect You?

When a dependent files as a single taxpayer, it generally doesn't affect the parent's taxes. You may still claim them on your return if it's appropriate. If your child must file jointly with another taxpayer, though, you may not receive as much benefit from claiming them because they can no longer be considered a "qualifying child".

Be sure your child correctly indicates in Box 6 that they are not claiming their own exemption, though. Otherwise, your own return may be affected if you claim their exemption as well.

If you're unsure how to handle your child's first tax return, you may choose to work with an experienced accountant or tax preparer who can help you -- and your kids -- navigate this new world of adult responsibility. For more information, contact a business such as Alexander & Associates CPA.

About Me

financial bookkeeping tips for contractors

As a renovation contractor, I have a lot of things to worry about each day. I have to think about my customers, my business, the insurance I need and even the employees that I have working for me. All of these things keep me busy enough without having to worry about keeping up with my financial bookkeeping each day. How do you keep up with the financial bookkeeping so that you don't make any errors that could cost you a whole lot of money? I have worked with my accountant to develop a process that has helped me and I have shared the tips he has taught me right here on my blog to help you.

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