income tax disappointment

[iamonlyone]

My husband is helping our 21 year old with her taxes. She lives 1,300 miles away in a high COL area, is a professional ballet dancer, and works 20 hours a week as an independent website consultant. I'm disappointed that individuals have to be at least 25 years old to qualify for the Earned Income Tax Credit. She is really going to take a hit.

Edited March 19, 2016 by iamonlyone

[Lanny]

I googled on irs.gov and ended up on this URL. Have you clicked on all the places where you can click? Looking quickly, I didn't see anything that one must be a minimum of 25 years old to qualify, but I didn't click everywhere and I didn't read every word.

 

https://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit

 

OK I Googled again on irs.gov with minimum age included in the search terms. Here's where they got her...

 

• And you must meet one of the following:
  • Have a qualifying child (see who is a qualifying child below)
  • If you do not have a qualifying child, you must:
    • be age 25 but under 65 at the end of the year,
    • live in the United States for more than half the year, and
    • not qualify as a dependent of another person.

If you qualify for EITC, you have to file a tax return with the IRS, even if you owe no tax or are not required to file.

Edited March 19, 2016 by Lanny

[iamonlyone]

I realize everybody wants to pay as little as possible for things—including taxes! But it seems like another instance when it sure is hard for young people starting out and working hard.

[Mergath]

I really don't understand why the government is so against college-aged people receiving any kind of low-income assistance. :(

[SparklyUnicorn]

It makes no sense to me either. 

[iamonlyone]

Thank you! I don't want to have an entitled attitude, and I feel a bit better just to see that I'm not the only one that thinks that it would be OK to allow younger adults the same benefits as older adults.

[Crimson Wife]

I really don't understand why the government is so against college-aged people receiving any kind of low-income assistance. :(

 

Students with well-off parents should not be mooching off the taxpayers.

 

If the student comes from a family whose income is too high to qualify for assistance programs, then that student should be required to prove that he/she is truly independent and self-supporting before being deemed eligible for assistance.

 

[Crimson Wife]

Remember that every scammer reduces the amount of assistance available for people who actually need the help.

[iamonlyone]

You have a good point, Crimson Wife. In our case, our daughter is not currently a student, but she has been living in another state and self-supporting for three years—even paying a college loan off. (She was an early bloomer.) But she can't count the loan payments on her taxes since she can't itemize. She isn't a homeowner, and she doesn't have dependents. She is very responsible and hardworking, but her age is working against her (not yet being 25 so no tax break). She will have to pay over 10% of her net income in taxes, and her earnings put her at the poverty line. This in a state where two loads of laundry at the laundromat costs $15.

 

Certainly these are all her choices, and she will be fine. In fact, she'll probably take the tax payment in stride. I was just rather shocked and disappointed that she would have to pay such a high percentage of tax when her income is so low and was disappointed that younger independent workers do not get the same allowances as those a few years older. I somehow thought that people with low incomes were in a low tax bracket so payments would not be so steep. Live and learn.

[Amy in NH]

We do qualify for EIC, fuel assistance, electric assistance, and state Medicaid.  DS is a student who has been living in Philly for three years and supporting himself for the past year and a half on student loans and a co-op job.  He hasn't been home in two years.  He filed his first tax forms this year and would qualify for EIC if he were 25, but he is only 21.  I worry that he doesn't have enough to eat, but we can't afford to help him very often.

Edited March 20, 2016 by Amy in NH

[SereneHome]

You have a good point, Crimson Wife. In our case, our daughter is not currently a student, but she has been living in another state and self-supporting for three years—even paying a college loan off. (She was an early bloomer.) But she can't count the loan payments on her taxes since she can't itemize. She isn't a homeowner, and she doesn't have dependents. She is very responsible and hardworking, but her age is working against her (not yet being 25 so no tax break). She will have to pay over 10% of her net income in taxes, and her earnings put her at the poverty line. This in a state where two loads of laundry at the laundromat costs $15.

 

Certainly these are all her choices, and she will be fine. In fact, she'll probably take the tax payment in stride. I was just rather shocked and disappointed that she would have to pay such a high percentage of tax when her income is so low and was disappointed that younger independent workers do not get the same allowances as those a few years older. I somehow thought that people with low incomes were in a low tax bracket so payments would not be so steep. Live and learn.

 

Unless I am misunderstanding, loan payments are not deductible to anyone, interest on student loans is deductible and you don't have to itemize to get the deduction.

[Mergath]

Students with well-off parents should not be mooching off the taxpayers.

 

If the student comes from a family whose income is too high to qualify for assistance programs, then that student should be required to prove that he/she is truly independent and self-supporting before being deemed eligible for assistance.

 

 

Well obviously a student being supported by wealthy parents isn't low-income. All money received, including gifts and support from parents, counts towards a person's income. But the government seems to have a special antipathy toward providing assistance toward genuinely low-income people in their early twenties, and I don't understand it. Young adults need food and shelter too.

[mom2scouts]

The government seems to be trying to extend childhood into the mid-20's. One of my sons moved out at 18, but couldn't use his own income for the FAFSA several years after he started living on his own and supporting himself. Fortunately for him, our income was low enough for him to get the help he needed, but it's wrong to treat all young adults like children still being supported by parents.

Edited March 20, 2016 by mom2scouts

[SparklyUnicorn]

The government seems to be trying to extend childhood into the mid-20's. One of my sons moved out at 18, but couldn't use his own income for the FAFSA several years after he started living on his own and supporting himself. Fortunately for him. our income was low enough for him to get the help he needed, but it's wrong to treat all young adults like children still being supported by parents.

 

Oh no. That is a FAFSA thing. 

 

Before a certain age you can't claim independence for the purposes of financial aid unless you are a ward of the state, married, or your parents have crappy credit.  Stupid, but true. 

[Amy in NH]

FAFSA=Free Application for *Federal* Student Aid

 

It is the government which sets the rules about age limits for using a parent's income for the young adult to qualify for aid.

 

And also the government which decided that young adults cannot qualify for low income tax assistance even when they are supporting themselves.

Edited March 20, 2016 by Amy in NH

[LucyStoner]

The earned income cut off for the EITC for single adults without dependents is under $15,000. The credit itself is a max of $503 for filers without children and actually just around $60 for filers approaching the upper limit of the credit. Most young adults are not able to support themselves fully on $14,000, especially not in a HCOL area. If one is fully self supporting on $14,000 or less, they are in poverty and their total tax liability should be negligible. I suspect that any hit tax wise your daughter is taking is due to needing to pay her own social security employment tax, which is a pitfall of being low income and self employed. The federal income tax should not be that high after the personal exemption. When you are self employed, you need to factor the amount of the self employment tax (which is what allows one to accrue SS credits and eligibility) into the rates charged. As I am paid, I set 15.3% aside to cover that cost.

 

ETA- working half time as a webconsultant and dancing professionally though, I would be somewhat surprized if she is actually in the income range for the EITC as a single filer. If she is, I advise her to contemplate the rate she charges for her web work.

Edited March 20, 2016 by LucyStoner

[Pen]

You have a good point, Crimson Wife. In our case, our daughter is not currently a student, but she has been living in another state and self-supporting for three years—even paying a college loan off. (She was an early bloomer.) But she can't count the loan payments on her taxes since she can't itemize. She isn't a homeowner, and she doesn't have dependents. She is very responsible and hardworking, but her age is working against her (not yet being 25 so no tax break). She will have to pay over 10% of her net income in taxes, and her earnings put her at the poverty line. This in a state where two loads of laundry at the laundromat costs $15.

 

Certainly these are all her choices, and she will be fine. In fact, she'll probably take the tax payment in stride. I was just rather shocked and disappointed that she would have to pay such a high percentage of tax when her income is so low and was disappointed that younger independent workers do not get the same allowances as those a few years older. I somehow thought that people with low incomes were in a low tax bracket so payments would not be so steep. Live and learn.

 

 

What tax prep program or system is she using, and does the 10% include both state and federal?  And does she file a schedule C? She likely doesn't have enough to itemize and get more than a std. deduction amount, but is that what you mean? Or do you mean that for some reason she is not allowed to itemize even though you believe itemizing would be better for her financially?

[Pen]

Why I asked the above questions is that I am confused by your posts.  

 

If your dd is close to the poverty line in income, that would be around $11,770 in most states. From that, I would guess that she has a standard deduction amount  ($6,300), plus a single personal exemption amount ($4000) such that the Federal tax amount of 10% would only apply to the approx. 

$1,500 above the deduction plus exemption. So the Federal income tax amount I'd expect would be only around $150.  

 

I'm sure you'd like it less, but is she actually paying a lot more than that?   If it is a lot higher, I'd guess that either you are wrong about something, or a mistake was made on how her taxes were calculated--like forgetting that to take the exemption and deduction, or someone claiming her as a dependent so she can't even though she is self-supporting...or something.

[iamonlyone]

Thanks for all the questions, it helps me understand the tax system a bit better. I'm sure the reason is the one LucyStoner mentioned: that she is paying her own self-employment tax. My husband and I had mentioned that factor to her, but my surprise came from the EITC age limit rules. I simply wasn't aware of them. Oh, I see that you wrote that the EITC is about $60 for those nearing the upper end of the scale (which she is). Well, that makes me feel better for her; sixty dollars is a help, but not a huge difference.

 

She'll be fine. It was just a surprise. Now she will know how to better plan for next year.

 

We'll have to go back and look to see if her loan interest amount can indeed be included in her taxes. Thanks for the tip. :)

 

 

Edited March 20, 2016 by iamonlyone

[Jane in NC]

Thanks for all the questions, it helps me understand the tax system a bit better. I'm sure the reason is the one LucyStoner mentioned: that she is paying her own self-employment tax. My husband and I had mentioned that factor to her, but my surprise came from the EITC age limit rules. I simply wasn't aware of them. Oh, I see that you wrote that the EITC is about $60 for those nearing the upper end of the scale (which she is). Well, that makes me feel better for her; sixty dollars is a help, but not a huge difference.

 

She'll be fine. It was just a surprise. Now she will know how to better plan for next year.

 

We'll have to go back and look to see if her loan interest amount can indeed be included in her taxes. Thanks for the tip. :)

 

Yeah, it was a real surprise to me the first time that I paid self employment tax.  I mean, I knew in my head that it would be required, but writing the quarterly check to the IRS still made me gasp.

 

As Lucy suggested, perhaps she should increase her rates for her web work. Do professional dancers pay self employment tax?

 

[Lanny]

I suggest, just to double check and get a "second opinion", that she run everything thru the free version of TaxACT.  With TaxACT one can file ALL forms the I.R.S. permits to be efiled, free.  If she needs to   file a state return also, I believe they do charge for that. She will need to file a Schedule C if she has Self Employment Income and she will need to pay Self Employment Tax (approximately 15%) on the Net Income from her business.   

[SereneHome]

But if she is paying SE tax, she is also deducting her SE tax, so her adjusted gross income should be the same, regardless.

 

People who are self employed do not pay more tax than people who work W-2 jobs

[Crimson Wife]

Well obviously a student being supported by wealthy parents isn't low-income. All money received, including gifts and support from parents, counts towards a person's income. But the government seems to have a special antipathy toward providing assistance toward genuinely low-income people in their early twenties, and I don't understand it. Young adults need food and shelter too.

 

The IRS relies on the individual to be honest about whether he/she is receiving support. It's just like all the people who get paid "under the table" and only declare just enough cash income to maximize government benefits. :thumbdown:

 

There was a big scandal in Michigan a few years back where the state tightened the eligibility for food stamps after they found 30,000 college students from well-off families were on the program. All the benefits those moochers received when they shouldn't have meant that truly low-income families who actually needed the help couldn't.

[LucyStoner]

But if she is paying SE tax, she is also deducting her SE tax, so her adjusted gross income should be the same, regardless.

 

People who are self employed do not pay more tax than people who work W-2 jobs

They don't pay more income tax. They do pay both the employee and employer portion of their social security- that is what is called the self employment tax. Also people who are employees never pay any portion of the social security and Medicare tax on their 1040- the employer deducts the employee portion from each check and remits the withholding and the employer half throughout the year to the IRS.

 

I am self employed as an accountant so I know what I am talking about here. ;)

[SereneHome]

They don't pay more income tax. They do pay both the employee and employer portion of their social security- that is what is called the self employment tax. Also people who are employees never pay any portion of the social security and Medicare tax on their 1040- the employer deducts the employee portion from each check and remits the withholding and the employer half throughout the year to the IRS.

 

I am self employed as an accountant so I know what I am talking about here. ;)

 

They pay both, but then deduct half, so AGI still reflects that.

[Joyofsixreboot]

I have yet to figure out how my 22 yo son making under $15,000 owed our state money. But he did. When did leaving home and becoming independent become a mark against you. Yes, he really is independent but poor ( national guardsman and EMT-$10/HR to save lives in rural areas folks).

Edited March 20, 2016 by joyofsix

[Pen]

Check also if she can take any deductions for special costs such as clothing or clothing cleaning related to dance as a work mandated clothing, beyond the normal, and whether she can take any expenses for running her own business (computer, maybe home office, advertising etc.)

[mamakelly]

I was doing mine and my college sons taxes on Turbo Tax and it said we owed $. I had a reputable lady do our taxes (without telling her I had already done them, but not filed it). We ended up not owing at all. After she had finished them, I told her I had run the numbers and came out different. Apparently I had failed to check *one box*, and that made all the difference. I vote that you get a second opinion.

[eternalsummer]

We don't pay income tax on the social security tax we pay (as self-employed people) but we do pay that social security tax.

 

So we pay an extra 8% or whatever of our income.  Then we can deduct that payment, so we don't pay the 30% or 25% or whatever rate *on that 8%*.  This reduces the burden to like 6%?

 

But it is still a 6% tax that w-2 workers don't pay (their employers pay it on their behalf, right?  And presumably pay them less wages than they would otherwise, so it balances out)

 

disclaimer: I have no real idea of what I'm talking about, DH does the taxes, but it seems like a ton of money every year :)

[LucyStoner]

They pay both, but then deduct half, so AGI still reflects that.

The "hit" is that the OPs daughter didn't anticipate the entirety of the self employment tax. If one pays it all at once annually and is not making much, it feels like a lot of money. The actual income tax is negligible at that income point.

 

The deduction for 1/2 of the self employment tax is a deduction to income. It does not reduce or impact the income tax all that much for modest income filers.

 

One thing she can do is remit the self employment tax quarterly to avoid having to pay it all at once. Then it's reported on the SE form but it's not being paid all at once.

[Tsuga]

I really don't understand why the government is so against college-aged people receiving any kind of low-income assistance. :(

 

Yep. Parents working? No Pell. No EIC. You're a child, after all. Your parents are still supporting you.

 

And then people complain that they act like children. Well look at the incentive structures! The worst is that â€‹if you get married or have a kid, suddenly you're eligible. So... what is in many cases (though not all) the least responsible thing, makes you eligible for adult-level benefits and programs? Argh.

 

I ate crap from 18 - 21, then another two years in the Peace Corps (not suffering compared to some). Luckily then I got a job overseas, but honestly... that is not something everyone can do.

 

Yes, you should pay self-employment tax monthly or put it in a separate account, but I completely agree that it's bizarre how young people are treated like dependents.

[Crimson Wife]

Yep. Parents working? No Pell. No EIC. You're a child, after all. Your parents are still supporting you.

 

I definitely think there should be a way for young adults who are TRULY independent and self-supporting to prove it and gain eligibility for things like the EITC, Pell Grants, etc. It would require documentation to keep those who aren't actually independent from gaming the system. And I would personally be more lenient on that documentation for students from moderate-income families since it's less likely that they are trying to game the system. A family with income just above the Pell Grant limit probably doesn't have a lot of spare cash to be supporting that child, but a well-off one with a clever accountant could be doing so.

[RootAnn]

 She will have to pay over 10% of her net income in taxes, and her earnings put her at the poverty line.

 

 I was just rather shocked and disappointed that she would have to pay such a high percentage of tax when her income is so low 

 

10% is the lowest tax bracket, isn't it? (10%, 15%, 25%, 28%, etc.) Roughly 1/4 of federal income tax filers fall into that AGI bracket (agi less than $15,000).

[LucyStoner]

10% is the lowest tax bracket, isn't it? (10%, 15%, 25%, 28%, etc.) Roughly 1/4 of federal income tax filers fall into that AGI bracket (agi less than $15,000).

That's that "tax rate" but it is not the effective tax rate thanks to the personal exemption and standard deduction.

 

For a single person the personal exemption is $4000 and the standard deduction is $6300. A single person with wage only income needs to earn more than $10,300 before they owe even $1 of federal income tax. A single person making $20,000 would pay 10% of $9700, or $970 in income taxes. That makes their effective tax rate just under 4.9% and not the 10% on everything up to $9250 and 15% on the remaining amount up to $20K. When my husband and I fell into the 25% bracket, our effective tax rate hovered around 1/3 of that amount.

 

People whose income is equal to or less than their personal exemption and standard deduction are exempt from filing but may be better off filing to reclaim any withholdings and claim tax credits.

Edited March 21, 2016 by LucyStoner

[livetoread]

My minor complaint in doing our taxes this year is that my oldest turned seventeen in 2015 and now doesn't qualify for the child tax credit. I was just assuming that credit went up to age eighteen (because, they aren't adults until eighteen, duh), so that's another 1k we owe this year. Ugh. Why make the cut off seventeen?

[FaithManor]

My minor complaint in doing our taxes this year is that my oldest turned seventeen in 2015 and now doesn't qualify for the child tax credit. I was just assuming that credit went up to age eighteen (because, they aren't adults until eighteen, duh), so that's another 1k we owe this year. Ugh. Why make the cut off seventeen?

Because our politicians are slimes! At least that's my take.

 

Ya, it makes no sense at all.

 

I want the thousand dog gone it since we don't make enough money to write $100,000 worth of tuition/room/board checks over the next few years, and don't get a single dime of financial aid either which they would get if they took off and were on their own, self supporting thought short of dh and I dying. it is nigh unto impossible for a self supporting young adult to be declared independent.  If they are my dependent for FAFSA then they are my dependent for the dang tax credit.

 

But my mind works in rather rational ways, and that is NOT something that can be said for the people who makes these laws and policies.