Students and teenagers often get summer jobs which can be a great way to earn extra spending money or to save for later. Here are some additional top tips from the IRS for people with summer jobs:
- New Employees. When a person gets a new job, they need to fill out a?Form W-4, Employee?s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the employee?s pay. The?IRS Withholding Calculator?tool on?IRS.gov?can help a taxpayer fill out the form.
- Withholding and Estimated Tax.?Students and teenage employees normally have taxes withheld from their paychecks by the employer.? Some workers are considered self-employed and may be responsible for paying taxes directly to the IRS. One way to do that is by making?estimated tax?payments during the year.
- Self-Employment.?A taxpayer may engage in types of work that may be considered self-employment. Money earned from self-employment is taxable. Self-employment work can be jobs like baby-sitting or lawn care. Keep good records on money received and expenses paid related to the work.? IRS rules may allow some, if not all, costs associated with self-employment to be deducted. A tax deduction generally reduces the taxes you pay.
- Tip Income.?Employees should report?tip income. Keep a daily log to accurately report tips. Report tips of $20 or more received in cash in any single month to the employer.
- Payroll Taxes.?Taxpayers may earn too little from their summer job to owe income tax. Employers usually must withhold Social Security and Medicare taxes from their pay. If a taxpayer is self-employed, then Social Security and Medicare taxes may still be due and are generally paid by the taxpayer, in a timely manner.
- Newspaper Carriers.?Special rules apply to a newspaper carrier or distributor. If a person meets certain conditions, then they are self-employed. If the taxpayer does not meet those conditions, and are under age 18, they may be exempt from Social Security and Medicare taxes.
- ROTC Pay.?If a taxpayer is in a ROTC program, active duty pay, such as pay for summer advanced camp, is taxable. Other allowances the taxpayer may receive may not be taxable, see Publication 3?for details.
One great long-term retirement saving vehicle for a teenager would be a Roth IRA.? Someone can invest the less of $5,500 or the amount of compensation earned during the year into a Roth IRA, and all the earnings grow tax-free to be withdrawn tax-free upon retirement.? As a simple illustration, a $4,000 contribution to a Roth IRA compounding annually at 10% would be worth $181,037 in 40 years!
Making an 83(b) election can save taxpayers significant taxes if they purchase or otherwise acquire shares of “restricted” stock in a company that is appreciating in value.? Over time, the restrictions attached to these shares “lapse” and the shares become “vested”.
One common restriction is the ability to sell your shares on the open market.? Non-vest shares generally can only be sold back to the company at the price originally paid for them.?? Shares held long enough for the restrictions to lapse, however, are worth their full fair market value and can be sold at your discretion.
Taking ownership of restricted shares of stock is challenging from a tax planning perspective.??As the shares vest and the restrictions attached to your shares of stock lapse, you are taxed on the fair market value of those shares on the date they vest.
Let’s say that you provide valuable consulting services to a start-up company, and they offer you the opportunity to purchase 100,000 shares of their stock at a price of 1 cent per share.? So your cost is $1,000.
The arrangement is that these 100,000 shares are restricted shares that will vest quarterly over 5 years at a rate of 5,000 shares per quarter, as long as your consulting arrangement continues.? If your relationship with the company is severed within 5 years, any shares that haven’t vested can be returned to the company and you will receive the 1 cent per share that you paid.? Meanwhile, you’ll continue to own shares that you held long enough to vest, and can sell them at your discretion.
Let’s also say that the day after you purchase the shares, the value of the company jumps to $10.01 per share, and then remains at that value for the next five years.? In this case, since 5,000 shares vest each quarter, you will need to report $50k of income each quarter, or $200k of income annually, on your personal tax return.? You report this income even though you don’t receive any cash as the shares vest each quarter.
The 83(b) Election to the Rescue:
By making an 83b election, you avoid reporting income each quarter as the restrictions on these shares of stock lapse.? Instead, you only report income once; based on the difference between the value of the shares and what you paid for them on the day that you acquired the restricted shares. You’ll report that income the year the shares are acquired.
- Making an 83(b) election provides for lower capital gains when you actually get the money by selling your vested shares (assuming one year passes from the date of the 83(b) election).
- Not making the 83(b) election means the possibility of getting hit with higher tax rates on phantom income as the shares vest since you don’t receive any money for your shares as they vest.
Please note that the larger the disparity between your cost and the shares’ value, the more expensive it is tax-wise to make the 83(b) election.? The second major pitfall is that if you make the 83(b) election and then your relationship with the company terminates, you don’t get to take a loss on the 83(b) income reported on the unvested shares.
How to Make the Election:
Usually, if you are working with a start-up company, the lawyer or the finance person helping out the company will guide you through making the 83(b) election.
The election needs to be made within 30 days of receiving the shares of restricted stock by submitting the properly completed and signed election statement to the IRS.
The company also needs to send in a copy of the signed 83(b) election, and you will attach a third copy of the 83(b) election to your personal tax return filed for that year.
Below is information provided by our friends at the IRS:
If you, your spouse or a dependent are heading off to college in the fall, some of your costs may save you money at tax time. Here are some tips on claiming an education-related tax credit on your federal tax return:
- American Opportunity Tax Credit.The?AOTC?is worth up to $2,500 per year for an eligible student. You may claim this credit only for the first four years of higher education. Forty percent of the AOTC is refundable. That means if you are eligible, you can get up to $1,000 of the credit as?a refund, even if you do not owe any taxes.
- Lifetime Learning Credit.The?Lifetime Learning Credit?is worth up to $2,000 on your tax return. There is no limit on the number of years that?you can claim the LLC for an eligible student.
- One credit per student.You can claim?only one type of education credit per student?on your tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For instance, you can claim the AOTC for one student,?and claim the LLC for the other.
- Qualified expenses.You may use?qualified expenses?to figure your credit. These include the costs you pay for tuition, fees and other related expenses for an eligible student.
- Eligible educational institutions.Eligible schools?are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify. If you aren?t sure if your school is eligible:
- Ask your school if it is an eligible educational institution, or
- See if your school is on the U.S. Dept. of Education?s Accreditation database.
- Form 1098-T.?In most cases, you should receive Form?1098-T, Tuition Statement, from your school by Feb. 1, 2016. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be different than the amounts you actually paid. That might happen because some of your related costs may not appear on the form. For instance, the cost of your textbooks may not appear on the form. However, you still may be able to include those costs when you figure your credit. Don?t forget that you can only claim an education credit for the qualified expenses that you paid in that same tax year.
- Nonresident alien.??If you are in the United States on an F-1 Student Visa, the tax rules generally treat you as a nonresident alien for federal tax purposes. ?To find out more about your F-1 Student Visa status, visit?U.S. Immigration Support. To learn more about resident and nonresident alien status and restrictions on claiming the education credits, refer to?Publication 519, U.S. Tax Guide for Aliens.
These credits are subject to income limitations and may be reduced or eliminated, based on your income.
By Andrew Schwartz, CPA, Founder of MDTAXES Network
While “Time Flies” is pretty much the industry standard, I prefer the words told to me by a Camp Director a few years back when I was dropping my son off at summer camp.? “The days are long but the weeks are short,” he said to each nervous parent.
What he is saying is that there is plenty of time each day to accomplish many things, but once days turn to weeks and weeks turn to months, it feels as if time just flies by.
So how are you doing hitting your goals that you set back in January? If the answer is not so good, you can take comfort in the fact that there are still 3 months to get some stuff done.? Please look at this 92 day window as a great opportunity to get some things wrapped up and off your to-do list before we start setting our 2016 goals and resolutions.
Here is all you need to do to get things done:
- State the goal
- Break up the goal into a list of doable tasks
- Start working on the tasks
Make October 2015 the month to make things happen with your personal finances. ?We’re here to help, so please contact our office with any questions or concerns.
It’s not too late to cut your 2014 tax bill.? Prior to Dec. 31st:
- Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put away up to $17,500 ($23,000 if 50 or older) into your 401(k) or 403(b) plan.? If you?re self-employed, consider setting up a Solo 401(k) by 12/31.
- Take a look at your withholdings and instruct your employer to withhold additional taxes if you haven?t had enough taxes withheld during the year and might get hit with an underpayment penalty.
- Consider selling your non-retirement investments that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds), and then can be used to offset up to $3,000 of wages and other income.
- Send in your January 2015 mortgage payment early enough so it will be processed prior to 12/31/14. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.
- Clean out your closets and donate your clothing and household items to a charitable organization since “non-cash” contributions are deductible if you itemize. Don?t forget to get a receipt. And make sure to make a list of the donated items, including each item?s condition since only donations of clothing and household items in “good condition or better” qualify for a deduction.
- For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2015.? And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.
- Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and won?t be subject to the Alternative Minimum Tax.
- Pre-pay or pay off your medical bills if your total medical expenses exceed 10% of your income and you itemize.
During December, you should evaluate whether you’ll save any taxes by postponing 2014 income or deductions into 2015 or by accelerating 2015 income or deductions into 2014.? While many factors should be evaluated prior to making your final decision, a few items to keep in mind are as follows:
- For 2014, a single person will itemize once allowable deductions exceed $6,200 and a married couple will itemize once allowable deductions exceed $12,400.
- A taxpayer is no longer subject to Social Security or self-employment taxes once wages and net self-employment earnings exceed $117,000 in 2014 and $118,500 in 2015.
- Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are only deductible to the extent they exceed 2% of adjusted gross income (AGI). Items paid with credit cards are deductible in the year charged.
- Medical and dental expenses are deductible to the extent they exceed 10% of AGI, and are deductible in the year paid.
If you need assistance in determining whether you should either postpone or accelerate your income or deductions, or whether you?ll be hit by the Alternative Minimum Tax (AMT), please give us a call.