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There is a wildly popular- and misinformed- belief that high school and college students and minors do not have an obligation and are not required to file and pay taxes. There are some truths to this particular assumption, however, it is not entirely accurate. There are certain minimum income and maximum age requirements established as to not wrongfully tax and impede on the financial situation of young individuals.
Being a full-time student is not a sufficient enough circumstance to completely exempt an individual from filing an income tax return. Any income received or finances used for tuition must be reported to determine if any federal taxes are to be paid or returned. Scholarships, grants, and fellowships are classified as tax-free resources if the amount received is used for tuition and supplies. Any portion of those resources apportioned to living expenses must be claimed. Often times college campuses will provide resources and consultations to help students file their taxes. Alternatively, online software is available as a quick solution for filing an income tax return.
There are many factors to consider when filing taxes while in college. The first step is to determine your dependency status; if you are claimed as a dependent by an adult you cannot make claims for yourself. Dependent status is typically dropped at the age of nineteen, however, parents can claim dependent children in college until they are twenty-four years old. As a dependent, there must be a clear distinction and no overlap between claims made by the parents and the individual. It is also important to know which tax forms are needed to complete an income tax return. W-2 forms can be obtained from an employer to indicate the amount of taxes withheld during the tax year. Tuition information is documented in the Form 1098-T, provided by the student’s college. Optional education credits such as American Opportunity Credit can be determined in the Form 8863. Lastly, the 1098-E form exists to show interest paid on certain student loans.
There exists a minimum income amount received by students that is necessary for the income to be subjugated to taxation. As of 2018, the standard deduction for all individuals is declared to be $12,000. This means that a received income of $12,000 or less will end up being non-taxable, and these students will be exempt from filing a tax return. The majority of students who work have some amount of federal taxes held from their checks. While they may not be required to file if make less than determined $12,000, they are not eligible to receive a refund for the amounts withheld from their paychecks. Filing is hence not mandatory but is often favored in instances where returned taxes are profitable.
Investment incomes available to minors and young adults are also subject to taxation. This income includes portioned amounts of money delegated in trusts and assets like estates, savings account, stocks, and bonds. Child income from interest and dividends of investment are also subject to taxation. If the child receives $2,100 or more in investment income they are required to file and may be subjected to the tax rates of their parents.
The taxation code in which part of a minor’s net unearned income can be taxed at the federal income tax rates is deemed the ‘Kiddie Tax’. However, this is an unfavorable tax because the trust and estate rates are unlike the rates individuals which can prove to be costly for minors without any earned income. The Kiddie Tax applies to individuals that are below the age of nineteen. Similar to the rules of student income tax return filing, college students under the age of twenty-four are classified under the Kiddie Tax and must report any of their unearned incomes.
The Kiddie Tax is calculated by adding the amount of unearned income to the amount of any earned income. The standard child deduction is then subtracted to determine the total amount of taxable income. This income is then taxed at regular rates if it exceeds the $2,100 income threshold. The Kiddie Tax is obviously inconvenient for individuals without any earned income. Consulting with tax professionals or college campus tax advisors is often beneficial in these situations to determine any available strategies available for reducing the burden of this tax.
Details of the aptly named ‘Kiddie Tax’ linked below:
https://www.marketwatch.com/story/new-tax-law-makes-dreaded-kiddie-tax-more-expensive-2018-09-24
