Summer Jobs

Remember your first legitimate job, that first paycheck?  If you are anything like me, you were probably mystified by the discrepancy between your mental calculations and the actual net amount on the check.  Not much can prepare you for that hard reality.  For many students, their first tax lessons are learned when they land their first summer job.

The IRS offers six tax tips for students starting summer jobs:

1. Fill out a Form W-4 so your employer will know how much to withhold.

2. All tips are taxable.

3. Money earned from odd jobs are taxable.

4. Pay self-employment tax if earnings are $400 or more.

5. Food and lodging allowances paid to ROTC students participating in advanced training are not taxable, but active duty pay is taxable.

6. Generally newspaper carriers under age 18 are not subject to self-employment tax.

Payroll Deduction Agreements

An individual seeking tax relief may be in a position to make installment payments to the IRS. There are three primary methods of making installment agreement payments: mail in a check, electronic debit, and payroll deduction. The taxpayer can initiate the electronic debit method directly on Form 9465 or Form 433-D. However, a payroll deduction agreement requires the use of a separate form (IRS Form 2159). There are three parts to this form: the Acknowledgement Copy (to be returned to the IRS), the Employer’s Copy, and the Taxpayer’s Copy. The front page of each copy is identical. However, there is an instructional second page to each copy, each containing different information. The second page of the IRS Copy contains a list of internal codes and number designations. The second page of the Taxpayer’s Copy contains some rather redundant instructions on how to fill out the form and what to do with it after it is completed. The second page of the Employer’s Copy is the most interesting. The employer is instructed to “continue to make payments unless the IRS notifies [the employer] that the liability has been satisfied.” This could be prejudicial to the taxpayer. First, the likelihood that the IRS will notify the employer in a timely manner is not very high. Second, if the taxpayer’s financial situation changes and he is unable to continue with the IA, it could be potentially very difficult to cancel the payroll deduction agreement.

 

Summer Day Camp Expenses

For some parents, the summer months mean additional child care expenses for their children under 13 years old who would normally be in school. If this sounds familiar, you should be aware of the Child and Dependent Care Credit, which is really available year round. This Credit may be applicable to Summer Day Camp too. Here are some IRS tips for you to consider:

1. The cost of day camp may count as an expense towards the child and dependent care credit.

2. Expenses for overnight camps do not qualify.

3. Whether your childcare provider is a sitter at your home or a daycare facility outside the home, you’ll get some tax benefit if you qualify for the credit.

4. The credit can be up to 35 percent of your qualifying expenses, depending on your income.

5. You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

IRS Interactive Tools

IRS.gov offers a couple different interactive tools designed to help with basic tax questions. One is called the “Interactive Tax Assistant” (ITA) and the other is called “Tax Trails.”

The ITA covers a limited range of topics:

  • Do I Need to File a Tax Return?
  • Who Can I Claim as a Dependent?
  • How Much Can I Deduct for Each Exemption I Claim?
  • What is My Filing Status?
  • How Much is My Standard Deduction?
  • Am I Eligible for the Child Tax Credit?
  • Am I Eligible for the Making Work Pay Credit or Government Retiree Credit?
  • Is My Pension or Annuity Payment Taxable?
  • Are My Social Security or Railroad Retirement Tier I Benefits Taxable?
  • Do I Have Cancellation of Debt Income on My Personal Residence?

The ITA topics are interactive in that they take the user through a series of questions, and the answer varies depending on the information furnished.  The user is never required to enter a social security number.  There is an ITA search box too, but I have not found that it generates good results.  Most of the time it either takes the user to the Tax Trails tool or it reverts to the general IRS search box that opens up the search to the entire IRS website.  Tax Trails has about twice as many topics as ITA.

Summer School

If you’re worried about your kid’s brain turning to mush over summer vacation, how about a free online tax course?  The IRS’ Understanding Taxes program is perfect for high school or college aged youngsters.  The course offers 24 lessons divided into 6 themes dealing with tax history and tax theory (the “Hows” of taxes).  And there is a separate set of 14 lessons dealing with the application of tax principles (the “Whys” of taxes).  The Understanding Taxes program includes activities, tutorials, fact sheets, simulations, and of course, every kid’s favorite: assessments.  This is one way to keep them on their toes until they return to school in the fall.

IRS Optional Standard Mileage Rate Increased to 55.5 Cents

The IRS optional standard mileage rate is being increased from 51 cents per mile to 55.5 cents per mile starting July 1, 2011.  The IRS normally adjusts the mileage rate each fall for the following calendar year.  However, this year, due to high fuel prices, the IRS is making an additional adjustment to the rate halfway through the year.  The 55.5 cents per mile rate will be effective until December 31, 2011.

Looking back, the IRS adjusted the rate part-way through the year in 2005 and in 2008 as well.  It peaked at 58.5 cents per mile back in the second half of 2008.

The standard mileage rate is used to compute the deductible costs of operating an automobile for business use.  It is ”optional” because taxpayers may choose to track their actual vehicle operating costs instead.  This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.  California employers are not required to use the IRS standard rate, but it is presumed to be reasonable.  If your employer reimburses you for mileage and is paying you less than 55.5 cents per mile after July 1st, you may want to point out the standard rate increase.

Do You Need to Adjust Your Withholding?

It’s nice getting a couple thousand bucks back from the IRS each April, right?  Of course it is, but its nicer to not hand it over to them in the first place if its just going to be coming back to you in a refund.  When you allow your employer to withhold too much, you are essentially loaning your money to the government all year.  Your goal should be to have your employer withhold only enough to cover the taxes you actually owe.  The IRS Withholding Calculator can help you determine how many exemptions you should claim on your W-4.  You may need to go back to the IRS Withholding Calculator when you experience major changes in your life, such as marriage, divorce, death of a dependent, birth of a child, other personal financial changes, or changes in the law.

However, take care that you don’t underwithhold either because if your employer does not withhold enough, then you will find yourself owing the IRS.