[Editor's Note: This is our second column from my daughter Whitney, a paid columnist here at WCI. If you (or your kid) missed her first column, you might want to read that first. Since Whitney was 12 years old in April, I figured she was old enough to do her own taxes, so she did. In this column, she explains what she learned from the process. Since her taxes are more complicated than those of most residents, perhaps this will give you the motivation to do your own. Reminder- be extra nice in the comments section as I'm trying to encourage my daughter's work and learning.]
Thank you to everyone who asked me questions and gave some nice feedback on my last column. This year I filed my taxes for the first time. Up until this point my dad filed all my taxes. This is also the first year that I owed any taxes. So here are
12 Things I Learned From Filing My Own Taxes For The First Time
# 1 Why I Filed Taxes At All
Lots of my friends babysit, but I don't think they all tell the IRS about their income. They don't have to if it is less than $400. I told the IRS about my babysitting money not only because I made more than $400, but because I wanted to put it in a Roth IRA for retirement, and I figured if I was going to do that I better report it to the IRS. My dad figured I should probably learn how to do my taxes, and this year my dad gave me the “Daddy Match” on all the money I made from babysitting/housesitting. This means that he gave me $775 of his money, and all of my earned money went into the Roth IRA, which is totally legal because I truly earned money by doing real work and because he is allowed to give up to $14,000 per year to anybody he wants without tax consequences.
# 2 My 4 Types of Income
I learned that I have four types of income: Wages, Business Income, Ordinary Dividends, and Qualified Dividends. I have wages that I make as an employee of The White Coat Investor, LLC. I have the money I make from babysitting, which my dad says is business income. I also have the dividends that I got from the mutual funds in my 20s fund. Some of those are ordinary and some are qualified.
# 3 Qualified Dividends
Before doing my own taxes, I basically didn’t know anything about dividends. There are two kinds of dividends, qualified and ordinary. Qualified dividends “qualify” with the IRS for a lower tax rate. Ordinary dividends get taxed at your “ordinary” tax rate.”
# 4 Low Income People Don't Pay Tax on Qualified Dividends
I didn’t have to pay taxes on my Qualified Dividends because I don’t make enough money yet. As a single person like me, you have to make $37,650 before you have to pay taxes on qualified dividends and long-term capital gains. However, we did have to report them. If I had made more than $37,650, I would have had to pay a 15% tax on the $204 I made in qualified dividends.
2016 LTCGs and Qualified Dividends Tax Brackets
# 5 Self-Employed Income Comes From Schedule C
I learned that Schedule C (or in my case, Schedule C-EZ) of Form 1040 is where you put down your business information, including your revenue and expenses. My revenue this year was $775 and I didn’t have any expenses.
# 6 The Taxes I Had To Pay
One of the things that I learned by doing my taxes was that there is a certain amount of money you can make in your business before you have to pay payroll taxes. That amount is $432. If you make $433 you have to pay $61 in payroll taxes. [Try calculating the marginal tax rate on that one-ed] Last year I made $335 dollars from babysitting, so I didn’t have to pay income taxes or payroll taxes. Not the case this year. In fact, I ended up having to pay $110 in payroll taxes alone on my $775! At least I got to take a $55 deduction for it on line 27!
# 7 No Payroll Taxes on Child Employees
The largest source of income I have is my wages, or employee income. In 2016, I was an employee of The White Coat Investor, LLC and I was paid $1,500 for modeling, as you can see in that great picture below. But I don’t make enough as an employee to pay taxes on that money. You actually have to earn more than $6300 before you have to start paying income taxes. My dad says the best part is that he doesn't have to pay payroll taxes for me or my siblings, since the business is 100% owned by our parents. So the money I am paid isn't taxable to the business, isn't taxable to me, will grow tax-free in my Roth IRA, and will come out to be spent decades from now tax-free!
# 8 Roth IRAs and 529 Earnings Are Tax-Free
My retirement account and education account are special accounts that the government allows to grow tax-free. In my 529 I made $3,025 in 2016 in market gains and dividends. My Roth IRA earned $190.33. But I don't have to pay taxes on any of that, as long as I only use the money for education and retirement.
# 9 Roth IRA Penalties
I also learned that you can’t take money out of your Roth IRA until you’re 59 ½ without paying a 10% penalty on it. The penalty is because the money is meant for your retirement. I don’t know why it’s 59 ½; my dad just said that it’s that way because the IRS said so, but that there are a lot of exceptions.
# 10 Dependents May Not Get to Take the Full Standard Deduction
I am dependent on my parents, since they give me food and let me live in their house. The standard deduction for a single person who is not a dependent is $6,300, but the standard deduction for a dependent is their earned income plus $350 with a minimum of $1,050. My standard deduction was $1500 (wages) + $775 (business income) – 55 (deduction) + $350 = $2,570.
# 11 I Don't Pay Income Taxes
Luckily, $2,570 is more than my Adjusted Gross Income of $2,070, so I didn’t have to pay any federal income taxes on any of my income. It isn't “taxable income.” My dad says that's not unusual, 47% of American taxpayers don't have to pay federal income taxes on their income. He also says if I ever decide to run for office, I shouldn't tell people that. They don't like to hear it, even though it's true, and it'll make me lose the election. But, like most people who earn money, I do have to pay payroll taxes- $110 this year. (See # 6 above.)
Whitney prepares to mail her taxes for the first time
# 12 Deductions Don't Cover Payroll Taxes
I also learned that deductions can't be applied to payroll taxes, which is why I had to pay taxes this year. As you can see, payroll (self-employment) taxes are added back in below the standard deduction. Luckily, my dad was nice enough to pay the $110 for me. 🙂
Thanks for reading my post and watch for a new one next quarter.
What do you think? Have you ever prepared a tax return for one of your dependents? What did you learn? Was there anything in this post that was new to you? What ways have you figured out to legally pay your children? Comment below!
Awesome!! I wish I could find a way to pay my kids some wages so I could sock matching funds away into a Roth for them, but as a W-2 employee it’s hard!
What a great post, Whitney! Thanks for sharing what you learned through filing your taxes. I have shared your article with my daughter Lucy who is about your age. Keep up all the good work! ~Matt
Thank You!
Great Job Whitney. I would wager to say you are ahead of 99.9% of other 12 year olds when it comes to tax law.
You’re probably ahead of 99.9% of legal adults. 🙂
Just keep telling yourself that paying taxes means you’re making money and preparing for your future. It’s a good thing. Keep up the great work.
Tom @ HIP
I would add some more nines to that estimate, like about 99.9999% of her age bracket. Many her age don’t have any financial information somewhat because their parents don’t either. When you don’t pay any federal income taxes you might not bother to understand them. That is also why many think the “rich” don’t pay their “fair” share.
Thanks!
Wholeheartedly approve of the the “Daddy match.” My children are in college. My deal with them is that if they save 20% of their income into something I agree with; I’ll give them their Roth IRA contribution. Maybe your dad will do the same when you move past baby-sitting.
Keep it up!
To clarify, even with a Daddy match, a child can only contribute up to their earned income amount to a Roth.
Couldn’t instead of offering a “Daddy match”, simply have the The White Coat Investor, LLC offer Whitney the employer match when she enrolls in the Roth 401(k) plan?
She’s not eligible for the 401(k). Which is good. Because then I’d need a real one with its additional costs and complexity instead of an individual one. Trust me, I spent a lot of time thinking about this.
Thank You!
Great post Whitney! Now you need to learn about social security law since you paid into it for the first time.
I don’t know if she even got one quarter of credit toward Social Security this year. Although she earned more than one quarter worth ($1260) she only paid SS tax on $775. We’ll see if a statement shows up in the mail.
Whitney, good job! I can tell you that you are waaaaay ahead of where I was at age 12. Or even age 18 as far as understanding taxes goes (or writing a column). I hope you will consider studying accounting when you go to college. I also hope to read more blog posts from you in the future.
If you have any friends who need to file income tax returns next year, I can envision more schedule C income – tax preparer!
Not showing any interest yet in accounting, keeps talking about medicine though. Might need to start boosting those 529 contributions. Maybe you can talk her into it though.
Doing taxes is painful but not hard. Really a good session for a kid. People pay people to do taxes because they feel that they don’t have time or are just not interested. I have found that most of the work is getting everything together to bring to an accountant who then hands it over to a clerical person to enter it into a software program. I have been doing my own taxes for 15-20 years. It is helpful because it forces one to gain an understanding of taxes. One cannot be the best investor unless you have a good understanding of the tax rules.
Great job!
I’m currently a resident and have never filed my own taxes before (always used an accountant). What are the best steps to take to learn how to file my own taxes? Turbo tax?
Thanks
It’s not a bad thing to do it on paper once, but Turbotax certainly helps prevent you from doing math errors and also allows you to run various scenarios (like what would happen if I made $1000 more.)
I think the first thing you should do is pull out last year’s 1040 and read down it.
Thanks so much!
Nice job Whitney!
Quick question, when you said ” he is allowed to give up to $14,000 per year to anybody he wants without tax consequences.” What exactly does that number come from. Is that from the LLC? Can I match my daughter’s babysitting money is she’s not also my employee?
I think she was referring to the IRS gift limit.
Exactly. Every person can give any other person (and every other person) $14K a year without using up any of their estate tax limit (currently about $5.5M).
Yes, you can do a “daddy match” of any money your child legitimately earns. Bear in mind the match can’t go into the Roth IRA, only what she earns.
Nice work. I think I started filing taxes at age 15 but it was a EZ form and over the telephone. Ahh the 1990s. Good to see you are learning all of the varied forms of income to report. This will help you for your entire life.
Woah, interesting! I know your kiddo is going to be thankful to have this experience, though! I cried the first time I filed taxes at age 21. Oh dear.
WCI, so is it worthwhile to file taxes since you lose the standard deduction of 6300 and instead have to go with 2570? Plus add another 110 (thats like 150 pretax).
Wonderful job Whitney, you are already ahead of me
You lost me. Are you asking if it is worth paying $110 to put $2070 into a Roth IRA? I think so. But it’s also the right thing to do. The money was legitimately earned and taxes are legitimately owed.
Consider also, as far as what WCI paid Whitney for modeling (and writing), that money is deducted from my taxes as a business expenses and I pay neither income nor payroll taxes on it. So every dollar I pay her is 46 cents I don’t pay in taxes.
If I could jump in here, WCI keeps the standard deduction of $12,600 (2016). They are not losing anything. Whitney cannot use her personal exemption because she is claimed as a dependent by her parents but she still has her own standard deduction, so the total standard deduction available to them increases.
At his income level, I suspect WCI has long since phased out of benefitting from the dependent deduction anyways.
Ha ha. Child tax credits. Don’t get those either. Far better to have employees than children for my tax situation!
Ha ha. Standard deduction. That’s funny. Haven’t seen that in a long time.
Ha ha. Personal exemptions. That’s pretty funny too. Haven’t seen those either in a while.
Thank you!
“He also says if I ever decide to run for office, I shouldn’t tell people that. They don’t like to hear it, even though it’s true, and it’ll make me lose the election.”
Hilarious. And True. And Sad. All at the same time. Paying taxes stinks. Sorry you are now in the 53% (even though you are kinda still in the 47% thanks to dad). Keep working and that Roth will be worth some good $ by the time your reach 59.5 in 47 years! Pure awesome sauce that you did your own taxes.
Thank You!
This is a great post for anybody, you really are quite mature. Your points on the self employment tax (social security) are something many don’t think about. Those 47% who don’t pay federal income taxes generally do pay social security taxes, but only half as I am sure you know.
Keep up the good work and if your dad is not paying more for these posts he should.
Oh he’s paying me plenty, it just all goes in my Roth IRA. 😉
Hey Whitney. Thank you for sharing your insights on doing taxes. This post gave me many things to think about. As a mom with a child a few years younger than be you, I’d love to teach and give him opportunities to understand money like you do. If you don’t mind, I have lots of questions.
How you feel about the dad match in your Roth IRA? Do you feel any temptation to pull it out for qualified penalty-free withdraws? Why or why, not? How long have you had a Roth IRA?
How did you track the amount of babysitting income you made?
Did you have a specific plan with your non-dad-match income? (Modeling/writing/babysitting) If so, would you mind sharing?
Also how often do you check your 20s mutual fund? How does your family determine how much goes into it? Do you have ideas of what you’d like to do with that money? What was the process of choosing what to invest it in?
Thanks for your perspectives, Whitney! And maybe you can get a bonus for taking the time to answer my questions 😉
I’ve been paying an accountant for 21 years now. This year though – 2017 – I’m going to take a shot at doing my own taxes. As early-retired with side income I suspect there will be some complexity still, but I consider myself a fairly smart guy. 🙂 So I suspect I’ll be able to figure it all out.
This isn’t an either/or. You don’t have to do it yourself with no assistance from an accountant. You can even do it all yourself, then pay an accountant to look it over.
Great post – very well written!
Well I do have a great editor. 🙂
Whitney, your post is truly a foundation of money management.
All I can say is I’m much older than your dad, and oh how I wish I knew what you knew at your age.
Thank you for the wonderful article, and BTW, you’ve got a great dad, I’ve learned a lot from him.
Amazing Post! Keep up the awesome work Whitney. You really inspired me to do my own taxes this year.
Great job with your post, Whitney!!!
It’s amazing how much you’ve already learned about tax deductions and exemptions.
I’m a little surprised that payroll taxes are due from babysitting even though your total income is well under the $6,300 limit. It makes me wonder whether Whitney Babysitting, LLC (your own business) could also pay you as a child employee and not pay any payroll taxes at all. Maybe something for the future. 😉
Some error in this idea (WHitney LLC) but I am uncertain what it is- WCI or Whitney please clarify the error or tell me it’s mine! I know we self-employed docs still get to pay payroll taxes on our own ‘wages’, and Whitney is not a family member of herself for purposes of avoiding payroll taxes on Whitney LLC’s staff. MIRite?
Yes, self-employed people pay payroll taxes as Whitney did. Neither Whitney, a minor employee, nor WCI, LLC pay payroll taxes on her WCI wages as WCI, LLC is 100% owned by her parents.
Whitney does not have an LLC, but it doesn’t matter. The taxes due would be the same.
I was thinking the payroll tax exemption might be available to her as the sole owner/employee of the babysitting entity. It wouldn’t be subject to the self-employment payroll tax in that case.
There isn’t too much reliable information for minor taxes since this kind of stuff rarely comes up for tax preparers. I’ve had experienced people tell me establishing Roth IRAs for the kids wouldn’t be legal until they turn 18 (which definitely isn’t true). Just forming an entity as a minor is confusing. Sole proprietor and limited partner are fine, but LLCs are state specific for age limits.
The limit is $400 of earned income. If she (or anyone else) earns $399 or less, no SE taxes are due. If you earn $1 more, you are taxed on the full amount. What you may be getting this mixed up with is the FICA obligation for children of the employer. WCI d/n/h to withhold/pay FICA taxes on Whitney since she is his daughter and < age 18. Note that this rule doesn't apply if the business is incorporated.
Thanks for the clarification, Johanna. All these subtle details. Along with confusing the earned income with the FICA exemption, I didn’t realize it was also limited to employing your *own* children (not any child worker under 18).
Sole proprietors have to pay payroll taxes, even if they’re a minor.
What I haven’t been able to figure out is whether they do any good or not if you’re not paying at least $1,260 of them.
See no reason to do your own taxes as a doc
I plan to start doing it when I close my practice.
@ken
Yeah! Doctors are way too important to ever do anything other than medicine. They should never cook their own food, take care of their kids, manage their finances or any of that other bourgeoisie stuff they can pay someone else to do. No way they should drive themselves anywhere either, there’s uber for that.
Very impressive, Whitney! WCI — perhaps you could ask a question to her and post a response.
What are your thoughts on being given some of this responsibility? What motivates you to learn this? Any recommendations you would give to parents OR other kids your age on helping them learn of what you’ve learned?
I’ll let her type the response herself when she gets home and reads these comments!
1. I think that being given this responsibility will help me in the long run because I will be a more successful adult knowing how to do some of this stuff, and actually understanding it at the same time.
2. I’m motivated to learn this stuff because they’re important life skills that everyone will have to learn at some point in time, so why not get a head start?
3. For other people doing their taxes the first time: It is actually very simple, there are instructions written everywhere, but it is time consuming. I would recommend sitting down with someone who knows what they’re doing and can explain what to do and why you have to do it.
Thank you for the reply — I should also mention I am impressed w/your succinctness. Brevity is is difficult at any age (it’s very difficult for me), but you seem able to easily summarize and convey your thoughts, which is more of a skill than you may realize.
A follow-up question — while you are clearly exposed to a great deal of personal finance info because of your father, when you are off on your own (school, friends, camp, etc), how much does any of this enter your mind? And are you trying to convey any of this to your friends and teach them as well, or is this more of something you keep inside the family?
I am primarily curious what the response is from your friends/peers when they realize how well-versed you are in money matters, and if it’s something they shut out (i.e. becomes awkward because they don’t want to learn about it) or if they want to hear about it.
Rogue Dad,
A lot of times money does come up outside of my home with my friends, and I’ve told them about my plans for college, and my Roth IRA, and other accounts. My friends do read my columns too. For example, some of my closer friends know what college I want to go to, and we’ve talked about how much college/medical school would cost in 7 years with inflation. Currently I have enough money in my college savings to pay for four years of college at the school I want to attend. (About how much college would cost in 7 years with the current rate of inflation.) Thanks for asking.
-Whitney
As a tax prep junkie (I did my dad’s for him for a few years in med school when I was still at home) I have done my 24 yo kid’s all her tax filing life until this year. And it was kind of tough for her to start (I still held her hand/ proof read/ prompted her a lot) doing it, might’ve been better when she actually lived at home still! Maybe (but it seemed too complicated and boring for someone else) kids should ‘help’ parents do parents’ taxes if kids have none of their own? Probably all us adults here have way too complicated taxes for a young teen to start off with. Need to figure this out for my 16 year old! Maybe she’ll ‘help’ me complete the FAFSA this fall as a start. She may not have taxes unless her scholarships are big enough/ nonqualified enough to warrant paying them or she is no longer our dependent (just last year for the 24 yo).
Whitney,
What a super post and great person you are. Your parents must be incredibly proud. I can’t beleive you know this much about finance and taxes. Thank your parents cause they’ve done you a great service you will benefit from for your entire life.
(Read this quickly, your dad will not agree 🙂 )
If you got $1500 for a 10 second photograph, I think you deserve a significant fee (certainly more than double) for:
1) doing your taxes and
2) preparing and publishing this wonderful article
Thank You! But I do get paid for the posts. I probably get paid just about the right amount for those pictures not to make the IRS suspicious. 🙂
Exactly. She gets paid the going rate for an article like this. Want to know how I know the going rate?
Wow Whitney!
You have motivated a 54 year old to at least try to do their own tax return. I’ll still pay my accountant to check it though. Thanks for the inspiration and for a very well written post. Great job.
I was told that kids who have under $6300 in earned income don’t have to file. Is that not correct?
There are exceptions to that rule. One is a lot of unearned income. Another is more than $400 of self-employed income. There are some others.
Great article. I am also so happy that it is “Kid’s Corner” and not “Kid’s Korner.” Thanks!
Yea, we might not be very smart around here but we learn quickly.