Ed Note: If you’re a recent college grad or a young professional just starting out, your income tax situation can be tricky — especially if you’re still receiving support from your parents as you work toward your first full-time gig. Our Millennial guest contributor Melissa Guerrero-Beltran explores the confusing tax situations of young Americans (many of whom still rely on their parents for support) and provides answers the big question: how do you know if you need to file a tax return?
As tax season rolled around and I saw friends and family receiving their W-2 forms, I wondered if I would be doing my taxes for the first time this year. I was a full-time student up until my May graduation and started my freelance writing career in late August so there were many questions to be answered. Had I earned enough last year to file my own taxes or was I still considered my mother’s dependent (even though I’m over the age of 23)?
Since beginning freelance writers aren’t often paid well and/or don’t get enough assignments, I set out to find out exactly what was needed to file a tax return. After that, I looked into whether I was still considered a qualifying dependent of my mother’s. I know many of you are in the same boat so I would like to share my findings with you.
First, you have to determine if you are required to file a tax return. The rules for filing a return and paying taxes differ depending on whether you are self-employed or receive wages as an employee.
Many college grads such as myself may find themselves self-employed either because they chose to work for themselves or because they are working on a contract basis. Self-employed individuals must file a return and pay their self-employment taxes if the net earnings from self-employment are $400 or more. To determine net earnings from self-employment you must complete Schedule C, Profit or Loss From Business, of Form 1040 and then use Schedule SE, Self-Employment Tax, to determine the amount of taxes you will owe.
Self-employed individuals are required to file these forms because, unlike employees, income taxes and employment taxes are not automatically withheld from earnings. Self-employment taxes are the equivalent of social security and Medicare taxes for self-employed individuals.
Whether or not you have to file a tax return as an employee will depend on a number of factors including your filing status, how much you earn, and whether or not you are a dependent of your parents.
For non-dependent taxpayers, you will need to file a return if your gross income meets or exceeds the filing threshold for your filing status. The 2012 filing threshold for a single (non-married) individual is $9,750 (for married individuals filing a joint return this threshold increases to $19,500). If you earn less than the filing threshold for your filing status and had income taxes withheld from your paycheck, you may still wish to file a return to receive a refund of all income taxes paid. Note: you will not receive a refund of any social security and Medicare taxes that were withheld.
If you are a dependent of your parents, it’s a little more complicated. You will need to file a return if any of the following are true: (1) you have unearned income (generally interest and dividends) exceeding $950; (2) you have earned income (generally from employment) that was $5,950 or more; or (3) your gross income was more than the larger of a) $950, or b) your earned income (up to $5,650) plus $300. For many recent college grads, you may still be eligible to be claimed as a dependent by your parents, so it’s important to talk to them before filing your tax return to ensure that you are filing properly.
The significance of being claimed as a dependent
Being claimed as a dependent by your parents means that you will no longer get to claim your own personal exemption, which is essentially a $3,800 reduction in your income before taxes are applied. Instead, your parents will claim this deduction on their tax return since they provided the majority of your support for the year. Additionally, being a dependent decreases the amount of the standard deduction you are entitled to claim on your tax return. The standard deduction varies by filing status, but for a single (non-married) individual, this deduction is $5,950. For single, non-dependent individuals the personal exemption and standard deduction combined create the filing threshold for the filing status. Instead of the regular standard deduction, a dependent is allowed the dependent standard deduction, which is the greater of $950 or earned income plus $300 — up to $5,950.
If you are claimed as a dependent on your parents’ return, the net effect of these rules is that more of your income is subject to tax than if you were not claimed as a dependent.
Note: If your net self-employment income is $400 or more, you must file a return and pay self-employment tax even if you are otherwise under the filing threshold.
How do you know if you’re a dependent?
What if your parents still want to claim you as a dependent? Many Millennials are over the age of 23, but there are still some young professionals who are under that age. Because of this, I looked at both situations. I will first address the dependent child (for those who are either under age 19, a full-time student under the age of 24, or permanently disabled regardless of age) criteria and then at the dependent relative (a dependent that cannot be considered a dependent child) requirements. Yes, there is a difference but even if you’re over 23 and no longer a student, you can still qualify as a dependent of your parents’.
To be considered a dependent child, there are four requirements (relationship, age, residency, and support) that the IRS looks at when determining whether you are a qualifying child. Since we’ve already established the relationship (parent and child), let’s look at the age requirement. You must be:
- under the age of 19 as of December 31st of the previous year.
- under the age of 24 and a full-time student for a minimum of five months during the previous year.
- permanently disabled, no matter what the age may be.
Many of us currently live with our parents (in order to save up), so we fit the requirement of living more than half of the year in the same residence. Note: there is also an exception to the residency requirement that essentially considers time away from the home while a student as time lived in the home. Thus, most full-time students will meet the residency requirement even if they lived outside the family home during the school year. You also cannot have provided more than half of your own support, meaning that you cannot have paid for more than half of your own expenses during the year.
If you’re like me and are over the age of 23 and no longer a student, you can still qualify as a dependent but you will be considered a qualifying relative as opposed to a qualifying child if you meet the requirements. To be a qualifying relative, you must meet several tests (relationship, gross income and support). Again, looking at it from the parent-child point of view so the relationship is established. To meet the gross income test, the dependent must have gross income that is less than $3,800 for the year. For many individuals that work, this could become a problem if they earned $3,800 or more in 2012. Lastly, you must have received over half of your support for the year from your parents. If all of these apply to you, than your parents can likely claim you as a qualifying relative.
So, there you have it. I hope my research will help you if you will be filing your taxes for the first time. If there are still some questions which have been left unanswered or are unsure of something, don’t hesitate to make an appointment at your local H&R Block office; they will help you with all your tax questions.