Save time & money on kids's tax returns: Just say "exempt"

A few months back I interviewed Andrew Schwartz for my 2011 Tax Tips article in Ophthalmology Business magazine. Andrew is a CPA who specializes in the tax issues that physicians face. His quick guest post might help you save the time and expense of filing a return for your kiddos.

Have Your Working Children Claim "Exempt" On Their W-4 Forms

by Andrew D. Schwartz, CPA of MDTaxes.com

I graduated from Wharton in 1987. For those of you keeping score at home, that means I've been working at my practice for a score and a quarter. Now that I've been practicing for twenty-five years, many of the clients I picked up earlier in my career have children in high school or college who have part-time jobs.

So far this tax season, I've noticed that most of these kids who work are incorrectly having federal and state income taxes withheld from their wages. Please note that a working child will generally owe no income taxes unless wages earned exceed $5,950 (in 2012) and/or investment income exceeds $300. Needless to say, most of the kids are getting back all the federal and state income taxes withheld during the year.

The IRS wants to help parents of working children avoid the headaches and costs of preparing tax returns for their kids who won't earn enough to be taxed. All you need to do is have your child write the word "Exempt" in Box 7 of the Form W-4 that is generally completed the first day of employment. If your child previously submitted an incorrect W-4, please have them file a corrected one with their employer as soon as they can.

Here is what the IRS says in their instructions to the Form W-4: Exemption from withholding. If you are exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it. Your exemption for 2012 expires February 18, 2013. See Pub. 505, Tax Withholding and Estimated Tax. And here are the instructions on the W-4 for line 7:

I claim exemption from withholding for 2012, and I certify that I meet both of the following conditions for exemption.

  • Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
  • This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

If you meet both conditions, write "Exempt" here .

Do yourself and your kids a favor by having him or her write the word "Exempt" on Line 7 of the W-4 form. Your working child will have more money to spend sooner (and will hopefully ask you for less of your money during that time) since no federal and state income taxes will be withheld from their wages. And you won't get stuck preparing a 1040-EZ for your child or paying your CPA $125 or more so your kid can get back their tax refund.