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Q: My 16-year-old daughter earned about $1,150 last year and used it for going out with friends, gas and clothes. My daughter expects to get a summer job this year, so I think she will earn more this year than she did last year (last year was just babysitting). I am willing to pay for a Roth IRA contribution just so she begins a savings program. Is it true that a 16-year-old can have an IRA? And if my daughter does not have to file a tax return in 2013, how do we prove that she had income to make the contribution with?
A: There is no minimum age requirement to establish an IRA. Contributions are limited to earned income of the owner. There is also a general limit of $5,500 per year that would affect your daughter, but it sounds like the earned income limit will be the one that matters.
Roth IRA contributions are not reported on a tax return. Conversions from a traditional IRA to a Roth are reported on Form 8606, but this form will not be required to report your daughter’s Roth contributions.
There is no required link between the earned income and the contribution, so that your daughter is free to spend all the money she makes and, if you are willing to do so, you can be the source of the Roth contributions.
Assuming you are eligible to claim your daughter as your dependent, she will not be entitled to a personal exemption, but she is entitled to a 2013 standard deduction equal to her earned income plus $350, not to exceed $6,100. She need not file a tax return unless her gross income from all sources exceeds this standard deduction.
As a side note, a tax return must be filed if a taxpayer has net earnings from self-employment of $400 or more. Even if there is no income tax due, self-employment tax is due and a return must be filed to compute and pay that tax.
A babysitter is considered to be a household employee of the family for whom services are rendered. Household employers must handle Social Security tax obligations if the employee is paid $1,800 or more during the year. However, no Social Security taxes are owed for a household employee under age 18.
I suspect that your daughter works for more than one family, and that no family will pay her $1,800 or more in babysitting fees in 2013. Assuming that is true, all we need to worry about is proving the earned income to justify the Roth contribution.
I would not advise you to file a tax return when one is not otherwise required. You will have a W-2 form to provide evidence of summer wages, and you will need your daughter to keep a record of babysitting receipts so you know how much can be contributed to a Roth.
Q: I am a stay-at-home mom who prepares the family tax return. My husband makes good money, almost $100,000, and he goes out to lunch each day with co-workers. He keeps lunch receipts because he tells me the lunches are tax deductible. I now have $2,112 of receipts and I know he expects me to deduct this on our tax return. I know this isn’t right, but can you explain why in a way that I can tell him?
A: You probably know as well as I do that personal meals are not tax deductible. I will suggest another approach that may better keep family harmony.
First, tax deductible business meals are deductible only for 50 percent of the cost. Second, deductible business expenses of an employee must be reported as miscellaneous itemized deductions, and must exceed 2 percent of adjusted gross income (AGI) to be deductible.
So you could put $1,056 (50 percent of the total) on line 21 of schedule A, and unless you have other such expenses you’ll see that the 2 percent of AGI limit will result in a deduction of zero.
It’s like racing your kids and letting them win. You can put the meals on the return, and there’s no reason for the IRS to raise a stink because they are just making your husband think he won.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.
