TAX TIP No. 2
Who has to file taxes?
The IRS also has different rules
for dependents who earn money. And even though
it's children we're usually talking about,
the IRS doesn't make it easy, setting different
earning standards for the two types of income,
unearned or earned, that trigger filing requirements.
Generally, a child must file
a return and pay tax due. But the amounts
that trigger the filing depend on the type
- Earned, generally
characterized as a salary,
wages or tips.
- Or unearned,
which includes investment
interest or dividends, capital
gains, unemployment benefits
and some trust distributions.
If a child (or any unmarried dependent younger than
65) has unearned income of more than $900, that person
has to file. A return is also required if the dependent's
earned income is more than $5,450.
What if a dependent has both
earned and unearned income but doesn't reach
the required filing amount for either? In
this case, you must look at the gross income,
that is, the total of both earned and unearned
amounts, and make a couple of evaluations.
In these cases, a dependent has to file if his
or her gross income exceeds either $900 or if
the dependent's earned income (up to $5,150)
plus $300 is more than that $900 amount.
For example, Jim, a 15-year-old
who lives with his parents and is claimed
as a dependent on their tax return, received
$700 in interest last year and was hired to
do odd jobs at his local youth center, for
which he earned $850. When Jim's gross income,
the total of his earned and unearned money,
is considered, he must submit a return because
the total came to $1,550 and that is more
than $1,150, the filing trigger established
by adding the $850 earned income plus $300.
While young Jim's income only had to be more than one trigger to require that he file a return, his gross earnings actually exceeded both the $900 unearned income filing amount and the earned income amount ($850 plus $300, or $1,150).
Don't forget about self-employment
earnings, whether you're a teenager running a lawn service or an
adult with a 10-person manufacturing operation. This money counts
toward determining if you have to file a return, regardless of whether
it was your sole source of income or just an occasional side job
to make a little extra cash.
If your annual gross self-employment income is at least as much as the income level for your filing status,
you have to send in a 1040 and Schedule C or C-EZ reporting your
earnings. And remember to file a Schedule SE to
pay self-employment tax if your net earnings exceed $400.
it pays to file
For those few who don't legally have to file, it sometimes pays to send in a return
This is the case for individuals who don't
earn much but might be eligible for the earned income
tax credit. This benefit is available to qualified individuals
even if they owe no tax, meaning they would get money
back from the federal government. Many people think
the credit is available only to parents. It's not. But
the credit amount is greater for eligible low-wage taxpayers
Plus, the IRS says that most
individual taxpayers are due a tax refund. But the only way they
can get that cash is to send in a 1040, 1040A or 1040EZ.
You can check out the filing
requirements section of IRS Publication
17 for more details on specific filing circumstances.