Apologies in advance if this isn’t an appropriate post for this forum; I just know parents here are knowledgeable on the tax front, and my question is related to financial aid taxation.
As parents in my last thread pointed out, I do have around 15k in non-QEE scholarship money. So, these will be taxable. Additionally, I’ll have around 20k in (gross) income from 2 consecutive – not concurrent – internships + freelancing (and maybe 2-3k more if I get a third internship; currently in discussion). I know this puts me right on the edge of the third tax bracket, but I believe the standard deduction amount for 2015 (~6300) will save me on that point. Please correct me if I’m wrong.
My parent is paying 0 for my living expenses and 0 for college; I believe I should be an independent student (not on FAFSA, but on taxes). With that said, I am only claiming 1 out of 2 exemptions on my W4 at work – I didn’t take the ‘independent’ one so they would overwithold and hopefully compensate a bit for the taxes I’ll owe later.
My question: in addition to not claiming all the exemptions I can, should I have my current employer withhold more? I’ve heard you can get hit with a penalty for not withholding enough (if you’re in a weird situation like I am where you have multiple jobs in one year and employers aren’t accounting for that on tax forms). Claiming just the 1 federal exemption currently I’m getting about 33% withheld from paychecks – which, in a major city, sorta hurts.
Thoughts?
I cannot see this being an issue.
If you are worried, put away $20 per week in a savings account and don’t touch it, and save it for tax time.
There is NO WAY someone in your income bracket would be asked to pay an estimated tax or “penalty” for not withholding enough. Our taxes are 5K plus per year and we don’t withhold enough therefore, and we have never been fined.
You mentioned 2 exemptions - you do understand that if you claimed 2 exemptions, you would be MORE likely to have to pay tax than if you are claiming ONE exemption? Each exemption means another person you have to take care of, so 0 means that you want the maximum tax taken, 1 is less tax taken, and 2 is even less. You would claim six if you had a spouse and 4 kids, and the government would take less money from you.
Right, that’s why I didn’t claim everything.
Thank you for your input! Just don’t want to mess with the IRS 
No one can say there is NO WAY you won’t have a tax penalty, because not enough information has been provided.
You can look at federal Form 2210 and the equivalent forms for your resident and non-resident states to get an idea of the rules.
Be careful if your freelancing means that you’ll get a 1099 in January (which technically should be the case if, in fact, you are a freelancer.) That means that ZERO has been withheld from your pay, and that your employer paid ZERO of your social security obligation (all of that is on you).
Are you actually getting a paycheck (the stub would show how much has gone to SS, state taxes if necessary, other deductions) or are you just getting a regular old check for your pay which you are calling a paycheck?
My mom just moved states, too, but I don’t live in her home – so I’m not sure what happens to my residency status, either. Sigh. I’ll figure it all out 
You won’t get hit with a penalty if you withhold as much as you owed in taxes last year. You’ll still owe the taxes, just won’t get an additional penalty on top of it.
If you decide/qualify to become independent (tax purposes) from your parents, you’ll get the personal deduction of about $4k also (then your parents lose it). This would then allow you to take the AOTC if you ‘slide’ $4000 in QEE to the taxable side of your return (your taxable scholarships would go to $19k).
It doesn’t matter if you are on the edge of the next tax bracket. Going to the next bracket doesn’t make all your earnings jump into that level. It is a graduated system, so everyone pays 10% on the first money earned, then 15% on the next money earned, etc. If you get to the third bracket, it’s only on the money earned in that bracket.
For your example, you’ll have $20k in earnings, $15k in scholarship overage for $35k gross income, and most likely AGI (if no other above the line credits or deductions- you could put some of this in an IRA!!!). From $35k, subtract $6300 for the standard deduction, $4000 for the personal exemption, and you have $24600 in taxable income. On the 2014 tax table, you’d owe $3240 in taxes. Have you had about that withheld?
If you do qualify for the AOTC, you’d be adding $4000 to taxable income, so you’d pay taxes on $29600 ($3526) but you’d get a $2500 credit, so your taxes would be about $1026. You also might qualify for an earned income credit or some other credits (savings credits, IRA contributions reduce AGI).
This is NOT TAX ADVICE, just an example. I don’t know if you do qualify to be independent from your parents’ tax return or if you qualify for the AOTC or EIC; suggesting you check it out. Tax years and FA years aren’t the same, and you can only take the AOTC for 4 tax years, but your schooling will stretch over 5 tax years.
I’m getting a paycheck from my (normal job) internship, but no 1099 from my freelancing, which I do through my website using Paypal and through another platform (which only issues 1099 if you make more than a certain amount on that website, and I won’t).
Even if there is no 1099-Misc issued for SE income, it is still subject to income and employment taxes.
Courtney would have to provide over 50% of her own support through EARNED (W-2 or Scedule C) income to get the refundable portion of the AOTC, if any.
See Publication 970, Chapter 2.
I know. Hence the major concern about penalties.
The scholarship tax and freelance stuff popping out of nowhere in April is A Problem. But I don’t know how to avoid said problem.
For the freelance work, you will need to file Schedule C and Schedule SE. On Schedule C you may have some business expenses that you can deduct from your income. Keep all of the receipts related to that business in one place so that you have them ready at tax time. There is some nice information on the web about taxes for freelancers, so google around to learn more.
Happykid has a lot of freelance income, so she claims no exemptions on her W-4s and the state equivalent. So far it has worked out.
When do I file those Schedules? Tax time? Thank you for letting me know
I do provide my own support from earned income, and will for more than 50% of this year, and 100% in years going forward. I’ll need to figure out whether I’m eligible for any of the education tax credits later, as I’m not putting my own money towards any expenses in the COA.
Edit: Deleted – misunderstood
Also, mostly unrelated to this thread’s question, but @twoinanddone I do have a Roth IRA and contribute the annual max to it
But it appears she is providing 50% of her own support. She’s contributing $20k+ to her own support, and her parents are contributing $0 (although did provide some during the first half of the year, was it $20K?). This is her first year of being self supporting and the figures might be blurred, but I wouldn’t have an issue arguing that she lived more than half the year (July 2-Dec 31) on her own and was self supporting for more than 50%. If parents agree they did not and do not claim her, the IRS is probably not going to argue that they should have and she’s not entitled to claim herself. This issue comes if she claims herself and her parents claim her.
You just take the unearned part out of the equation to get to the 50% support number. Parents don’t get credit for it, student doesn’t get credit for it, it is as if is didn’t exist. What was the total cost for Courtney to live in 2015? After the scholarships R&B is subtracted, did her $20k cover half?
You are planning for the tax issues, so should be okay. I don’t read your post as saying you earn $3k for freelancing, just that much more is possible income if you get another internship in the fall? If you have freelance income under $500, it won’t be a big deal to pay the self employment tax on it.
A Roth IRA is an excellent thing for you to have. It does not reduce your income for tax or financial aid purposes.
Standard deduction of $6300, personal exemption of around $4k if your parents can’t claim you as a dependent on their return. Different terms which it helps to keep accurate.
My parent’s support for the first part of the year is less than 20k. I’ll probably make around 1-2k from freelancing this year. The 3k+ figure is what I could potentially make from the third internship, if I do accept it.
I have had over 3k withheld, and as my income is significantly higher than it was last year, I’ve already withheld more than double what I paid in taxes last year. So… hopefully no penalty. Will get a professional to look over everything.