<p>If I understand correctly, dependent's who are going to school full time pay income tax at their parents' rate.
I am working this gap year, and will make a decent chunk of change as an independent contractor. This means I will also be paying self employment tax, and FICA. If I am paying at my dad's rate, though, I am getting boned by the IRS (like 40+%, I estimate)
I am paying for school next year out of a trust, in my name, that my dad will be authorizing payments from.
Ideally, obviously, I would prefer to stop being a dependent so I can keep my hard-earned dollars. Do you think, given the above circumstance, that I will be able to file as independent? If I do so, will I still be covered by my dad's health insurance?</p>
<p>On a side note, does anyone else think it's really backwards that dependents enrolled full-time get taxed at their parents' rate? Does the IRS not want students working?</p>
<p>I don’t understand why you think you’d be taxed at your parent’s rate but that is not true. Suggest you go to irs.gov and read the instructions on filing a 1040 and schedule C. You can and will file on your own, and be taxed according to your own taxable income.</p>
<p>Although I will be paying for my tuition, my earned income won’t be more than half my support (how could it be, with tuition prices these days???).</p>
<p>So therefore, am I correct to say I could be independent and STILL have to pay the Kiddie Tax on investment income???
Or if I am PAYING for more than half my support (tuition, books, room and board, clothing, etc) and I’m not a dependent, will I then have to pay the kiddie tax?</p>
<p>"Thus, it is possible for a child between the ages of 18 and 23 to be subject to the Kiddie Tax despite failing to qualify as a dependent.</p>
<pre><code>Example 4: Trudy, age 18, provides all of her own support of $10,000 in 2007. She earns wages of $4,000 and receives interest income of $6,000.
Trudy will not qualify as a dependent of her parents since she provided more than half of her own support. On the other hand, Trudy will be subject to the Kiddie Tax because her earned income ($4,000 of wages) is less than half of her total support and her unearned income ($6,000 of interest) exceeds the 2007 Kiddie Tax threshold of $1,700."
</code></pre>
<p>I guess I assumed that “a decent chunk of change” during a gap year would amount to far more income than your example above. How much earned income do you anticipate having this year?</p>
<p>To summarize, for anyone interested in this rather unique situation (I am not 100% sure, but 99%):</p>
<p>-Being a dependent has nothing to do with the kiddie tax
-The kiddie tax doesn’t apply to earned income (so, luckily, I will still take home most of the money from my job)
-Long term capital gains are taxed at 15% either way
-Full time students who are making >$1900 in interest, short term gains, and dividends should really try to reduce this type of income if their parents are in a high tax bracket, because that is the rate that they will pay at, unless…
-Unless their EARNED INCOME (wages) exceed 50% of their support (including tuition). This is highly unlikely. Additionally…
-not being a dependent is NOT an “out”</p>
<p>Maybe around $10k…It really depends. There is no way that my “support”, tuition included, will be less than $20k though. I am just going to take the strategy of optimizing my portfolio to reduce earned interest/short term gains/dividends and go for long-term growth stocks. This tax law is really messed up, but it could be worse…I guess. Basically I will have to be extremely careful until I am out of school. Any slip-ups could cost me >30%. Also, I looked it up, and I will have to pay 15% rather than 0% on long term capital gains. Jeez.</p>
<p>Being independent and declaring yourself as your dependent on your, not your parents’, tax forms are two different things. Son has taken the deduction instead of us at the advice of our tax preparer, a very law abiding professional. We still pay most of his school bills, but he/we save money this way.</p>
<p>Can I just say, as a person in a family with very limited funds, I would rather have income and get to keep 60, or 70, or 85 percent of it and pay the rest in taxes, than to not have any of that income to help my family, or my child at all. I know it’s hard, but you really need to consider how fortunate you are to have a job, first of all with so many people looking for work, and secondly, money in a trust and investment income. Most people I know don’t have at least two of those.</p>
<p>wis75, I thought that the dependent-or-not issue was based on the facts of the situation, that one doesn’t get to pick or choose which one to use.
If you’re paying for your son’s school, then how is he “independent”?</p>
<p>I’m confused…you referred to this as a “gap year” and yet seem to be using rules/examples for full time students. I agree that you should probably consult a tax professional for advice and strategies on how to minimize the impact of the Kiddie Tax rules on your college savings. Will you actually be a full-time student for 5 months in 2010? With a $10K income, you may find that the Kiddie Tax doesn’t apply if your tuition is also paid from your own assets. I would inquire about the possibility of transferring some of these assets to a 529 account if your father has not already done so. I think many people went that route when the Kiddie Tax came along.</p>
<p>The IRS allows people to be declared on another person’s income tax form if they meet the criteria, this doesn’t mean the other person can’t give up a deduction. Best ask the tax people. I know it is legal- our conservative accountant wouldn’t otherwise allow it. IRS rules/definitions do not match other rules.</p>