Breaking the Code: Summer Tax Tips for Families
By: Rachel Speigle Dunnigan, CPA, MSA
Summer is great for spending time outdoors, relaxing with family and friends, and taking advantage of those well-earned vacation days. But don’t zone out too much! We’ve compiled a few ideas for families and parents with young children so that you don’t get to the end of August without utilizing some great money savers.
Ice Cream Shops and Lifeguards
If your ambitious child decided to get a summer job, there are a few things they should know before they get to scooping mint chocolate chip or saving lives like Wendy Peffercorn.
When they start their new job, they will be asked to fill out a Form W-4. If they will not earn income over $12,000 in 2019, they can choose to be exempt from Federal withholding any tax (for Massachusetts - $8,000), as they will not need to file a tax return. This ensures that your child keeps all of the income they’ve earned without needing to file a tax return the following year for that pesky refund. More money in the pocket for mini-golfing!
If they plan to make over that threshold of $12,000 or they have unearned income greater than $1,050 – interest, dividends, or capital gains – they will need to file a tax return so should claim 0 or 1 withholding allowance. This will minimize the sticker shock of having a balance due during the tax season.
An item of note for the golf caddies and waitresses, the hopefully large tips that your child receives is considered taxable income too! These tips should be tracked and included on a tax return if they are required to file one.
Start Saving Early
Another great idea for kids with summer jobs is to start contributing to a Roth IRA. The only requirements in order to be eligible to contribute include earning income from a job, regardless of age. This money can come from their earnings or can be given to them by their parents to invest. The contributions are limited to the amount they earned during the year with a maximum of $6,000 for 2019.
This can make a big difference when you consider the time value of money! Starting retirement savings early means that your child can withdraw the contributions and earnings tax-free in many years when they turn 59½. It is also a fantastic opportunity to teach them about saving money and investing in their future!
Daycare and Summer Camps
Some kid-free hours and a tax credit on your 2019 taxes? Sign us up! If you have child under age 13 and you’re paying a daycare center, babysitter, summer camp, or other care provider for childcare, you may qualify for a tax credit. This credit may amount to up to 35% of the qualifying expenses of $3,000 for one child or up to $6,000 for two or more children.
This credit does come with some stipulations: both parents must be working or actively looking for work; only day camps are eligible; expenses for supplies for camp do not apply; and will need either the child care provider’s Social Security number (for an individual) or an employer identification number.
Regardless of how your family chooses to spend their warm weather weekends or vacations, we all hope you have a safe and enjoyable summer!
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.