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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
When do students and dependents pay income tax?
Tax Talk

Claiming exempt status

Dear Tax Talk,
As a manager, I hold orientations for new employees that include filling out the W-4 form. Most of my employees are teenagers and never know how to fill it out. I know that I should not advise them on how to fill it out so I have them call their parents. All I know that I can tell them is that they would either put zero in allowances taken out or exempt on line 7. Different parents give them different directions.

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I now have a teen myself who just got her first job. I know she can claim exempt because she is a student, but how do I do my taxes? Do I still claim her? Would she do her own taxes? I am a part-time student myself and work full-time making $30,000 per year, so would I be able to claim exempt? I currently claim two allowances.
-- Debbie

Dear Debbie,
Students and dependents are not exempt from income tax. If a dependent earns wages for the entire year that do not exceed the standard deduction, he or she does not have to pay income taxes.

It's kind of confusing because the dependent is not entitled to a personal exemption because he or she is the dependent of another. However, the dependent is allowed to earn an amount equivalent to the standard deduction (which is more than the personal exemption) and avoid paying income taxes.

In 2008, the standard deduction for single taxpayers is $5,450. So long as the dependent's wages for the entire year, including other jobs, are expected to be below this threshold, they can claim exempt on their W-4.

A parent can claim a child as a dependent regardless of the child's income if they meet all of the other conditions for claiming an exemption (such as providing more than half of their support, being a citizen or resident) and the child meets one of the following criteria.

Additional rules for dependents
Under age 19 at the end of the year,
A full-time student under age 24 at the end of the year, or
Permanently and totally disabled at any time during the year, regardless of age.

If your daughter meets these rules, you can continue to claim her as an exemption on your tax return. She can claim exempt on her W-4 if she is expected to earn less than $5,450. If all she has is a W-2 for less than this amount, she will not have to file a tax return. She'll need to file a tax return if her income exceeds this threshold or she might otherwise owe tax.

You cannot claim to be exempt because your income is so high, even though you are a student.

Bankrate.com's corrections policy -- Posted: July 24, 2008
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