Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
These are a few myths I hear during the tax season:
Students Don’t Have To Pay Taxes: Wrong. Anyone who works has a possible obligation to pay tax. Depending upon the amount earned, there may not be any tax, but just know that a student is not in a special ‘no-tax’ category. A summertime employer may incorrectly classify a student as an “independent contractor,” sending a 1099-Misc form at year-end. If this is received, and the amount is more than $400, there will be social security tax of 15.3 percent due on that amount.
My Child Cannot Be My Dependent Because S/He Worked: Wrong Again. A qualifying child must meet five requirements:
- Relationship: Must be a son, daughter, stepson, stepdaughter, or their descendant; or a brother, sister, stepbrother, stepsister, or their descendant; including foster and adopted children, AND
- Age: Must be under 19 at the end of the calendar year, or under 24 at the end of the calendar year and a full-time student (part of five calendar months at a qualified educational institution), or at any age, totally and permanently disable at any time during the year, and younger than the taxpayer.
- Principal Living Place: Live with you for more than six months during the year, except of school or illness. (There are special rules for divorced or separated parents, as well as for a child who is born or dies during the year.)
- Support: The child must not provide more than half of their own support. Scholarships do not count, but working does.
- Joint Return: The child cannot file a joint return with their spouse except to claim a refund.
I Can Sell My House Tax-Free Because I’m Over 55 Years-Old: Nope. That was the old law. The new rules give you a better tax break. As long as the property was your principal residence for at least two out of the last five years, you have a tax-free gain of up to $250,000 ($500,000 on a joint return). Your age is irrelevant. In fact, you can flip your house every two year, and not pay a penny tax.
Married People Have To File A Joint Return: Wrong. You may file as “married filing separately.” Normally, filing separately does not save tax, but there are a few exceptions:
- On a separate return, the medical expenses, casualty losses, or miscellaneous deductions may be deductible because the phase-out limitations will be lower, because they are based on only one person’s income.
- You may also want to file “separately” if you suspect that your spouse is not reporting all of their income. (If you do file jointly in this case, you may be able to avoid the extra tax as an ‘innocent spouse.’)
- One other note, if you are married but living apart from your spouse, you may file as a “head of household” if:
- Your spouse was not a member of your household during the last six months of the year, and
- You file separate returns, and
- You maintain a household for more than half the year for a dependent child.
There are a number of other myths as well, so if you prepare your own return, make sure you are up to date on the tax laws.
And by the way, the above are only general comments — there’s an “if” and “but” in every situation.
Have a good week.
Quip: Are you an accountant? If you tell your wife that you cannot answer the question: “Do these jeans make my butt look big?” because you lack independence, and there may be a conflict of interest, you might be an accountant. And, if your wife buys that explanation, she might be an accountant.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.