Every year around this time many parents ask these questions:
- My child has some income last year, does he have to file any income tax return?
- My child has some income last year, do I have to add this income into my tax return?
- My child has some income last year, must he report this on FAFSA if he does not file any tax return?
- My child has some income last year. Can I still claim my child as my dependent on my tax return?
- If I do not claim him as my dependent, can he file FAFSA as an independent student (thus my income and assets are not reported on FAFSA?)
Below are answers to the above questions:
1.Every taxpayer has at least a “standard deduction” and for 2018 it is $12,000. That means for a single person (i.e. your child) he or she has at least this amount of tax-free income. If his or her wage earning (shown on box 1 of W-2 form)last year does not exceed this amount then there is no income tax liability at all (i.e. zero income tax).
If his W-2 wage does not exceed this amount, there is zero tax liability.But even if his income is below these amounts (so there is zero tax liability), he may still wish to file a tax return if some income tax has been withheld. He does not NEED to file any tax return if he does not want to (because he has no tax liability). But to get back the income tax withheld (from the IRS and from the State) a federal and state tax returns need to be filed. If the refund amount is very small, you should try to do the return yourself or get a free tax service to do it for you. You do not want to pay $50 to have a professional tax preparer do your child’s return in order to get back $16 in tax refund.If your child has income that is reported not on W-2 but on 1099-MISC, then he must file a tax return if his income is over $400. The reason is he has to pay a “self employment tax” for social security. This tax is approximately 14% of his self employment income.
2. Usually if a tax return is to be filed for the child it has to be a separate tax return in the child’s name. If a child is under 19 (under 24 if the child is a full time student) it is possible to file the child’s income in the parents’ return. But the child can only have interest and dividend income. Anytime the child has earned income (e.g. wages) this election is no longer possible.
Even if a child’s income can be reported on the parents’ tax return it may not be advantageous to do so since it will push up the parents’ income and taxes.
3. Regardless of whether your child files a tax return, his income still needs to be reported on FAFSA under the student’s income questions.
4. Regardless whether the child files his own tax return, the parent’s could still claim the child as a dependent on the parents’ tax return. Whether the child qualifies as the parents’ dependent would depend on several factors. The most important factor is whether the child was providing more than half of his living expenses last year. Few children will have sufficient income or resources to provide more than half of his living expenses. Note: grants and scholarships do not count as support. .
5. Many people, including professional accountants, have this misunderstanding that if a child is not claimed as a dependent on the parents’ income tax return then the child can apply for financial aid as an “independent student”, thus there is no need to put in the parents’ income and assets. THIS IS FALSE. Tax reporting and FAFSA dependent/independent status are two entirely separate things.
In FAFSA, there are several questions (Section 3) to determine if a student can apply as an independent student. The student would have to be able to answer at least one of these questions YES before he can be an independent. Essentially he needs to be at least 24, or married, or has a dependent, or is a veteran, or in graduate studies, etc. before he can be an independent. If he cannot answer YES to any of these questions, he must file his FAFSA as a dependent student.
Another misconception is to use a different address for the child. It does not give the child independent status on FAFSA just because you use a different address for your child.