April 15 deadline also looming for many kids

By Steve Rosen
Knight Ridder News Service

Here's a tip to keep in mind between now and April 15: Grown-ups aren't the only ones who have to file federal tax returns.

Many kids do, too.

When it comes to taxes, Uncle Sam doesn't care whether you're a 60-year-old CEO or a 16-year-old junior partner on a lawn-mowing crew.

Age is not an issue; the main prerequisite is income.

Whether kids owe taxes for 2003 or even have to file a return depends on how much money they made during the year and where it came from.

Basically, the Internal Revenue Service requires a child to pay income tax if he or she had earned income of more than $4,750 in 2003 or unearned income from investments of more than $750. For answers to the stickiest and most complex questions, a good starting point is to visit the IRS Web site, www.irs.gov, which has a lengthy section on kids and taxes.

Here are some situations that could come up with kids this tax season:

Teens who work at grocery stores, restaurants, fast-food chains or other businesses fill out W-4 forms when they are hired and, in most cases, their employers withhold Social Security tax, as well as federal and state income tax. This withholding will show up on the youngsters' W-2 forms. Keep in mind that all tips are considered income and are subject to income tax.

Even if the teen didn't make enough money last year to owe federal income tax, he or she still needs to file a Form 1040EZ to receive a refund.

Children who mow lawns or baby-sit technically are self-employed, according to the IRS, and might have to pay income as well as self-employment tax. (This tax pays for Social Security and Medicare for the self-employed.)

Granted, many kids don't make big bucks as self-employed entrepreneurs, so taxes aren't an issue. But if the business is successful, "this is where we sometimes see problems," said Jackie Perlman, senior tax research analyst at H&R Block Inc. in Kansas City.

The trigger for filing a self-employment tax schedule is $400 in net earnings, which is calculated by subtracting any business expenses such as supplies, car expenses or mileage from gross earnings.

There is an exception to the self-employment tax rule — it does not apply to newspaper carriers younger than 18.

If your child has investments in stocks, mutual funds or certificates of deposit, the "kiddie tax" could come into play.

For children younger than 14, the first $750 of investment income is tax-free, and the next $750 is taxed at the child's rate, according to the 2003 limits. Above $1,500, the kiddie tax kicks in and investment income is taxed at the parent's rate. (Children 14 and older pay tax on all investment income over $750 at their own rate.)

For the 2004 tax year, those limits for children younger than 14 will be $800 tax-free and the next $800 at the child's rate, for a total of $1,600 before hitting the "kiddie tax."

Many parents include their children's investment income in their own returns to avoid the hassle of filing additional tax forms for their kids. But this could be a bad idea because you might wind up paying more tax, said Julie Welch, a Kansas City certified public accountant and co-author of 101 Tax Savings Ideas.

Kids who have earned income from a job are eligible to open traditional or Roth individual retirement accounts. Youngsters can contribute up to $3,000 a year into a retirement account. If, for example, your daughter earned $1,500 from baby-sitting jobs in 2003, she could contribute up to $1,500 to an IRA. A parent would need to co-sign to open a retirement account for a minor.

Roth IRAs are especially popular. Although contributions to a Roth aren't tax-deductible, earnings are tax-free if the account is not tapped until age 59 1/2.

Understandably, it's hard to get any kid to think about saving for the proverbial rainy day, but if they have some income, preach the "pay yourself first" habit. That could mean setting aside money for an IRA—or saving for a laptop computer or a new set of wheels.

Whatever the approach, get your son or daughter into the habit of saving money.

Filing returns and paying taxes aren't the most exciting things for kids (or grown-ups) to think about. But, suggested Perlman, "it could provide an opportunity for your teenage son or daughter to pick up some necessary skills that could serve them well later in life."