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Common Family Tax Questions

What better workers than your children to help out with the family business?! The question, however, is whether or not you have to report what you pay your children.

The answer is yes, if related to your business. In this case, your children are considered common law employees and a W-2 needs to be filed for each child that you have paid to work for your business. And, really, reporting what you pay your children to help with your business is beneficial to you, as it will help to offset your business income and reduce your tax expense.

What about the money your children have earned throughout the year? Do they have to file, as well?

According to Government Publication 929 of the Internal Revenue Service (IRS), each dependent child needs to file if he or she has an unearned income, such as investment gains, in excess of $850 or an earned income of over $5,150. An additional rule is that if your child’s gross income is greater than the larger of either $850 or his or her earned income (up to the $5,150), then he/she is also required to file.

Now that the children are taken care of, let’s talk about mom and dad. Is it better for a husband and wife to file together or separately?

In most cases, it is more advantageous for a married couple to file jointly. When married couples decide to file separately, there are eleven special rules that apply. And, Government Publication 501 of the Internal Revenue Service (IRS) even states directly within it that “because of these special rules, you will usually pay more tax on a separate return than if you used another filing status that you qualify for”, such as filing jointly.

A few examples of the disadvantages of filing separately are: being taxed at a higher rate; loss of several popular tax deductions or credits, i.e. child and dependent care expenses, earned income credit and education credits; and if your spouse itemizes his or her deductions, then you lose your ability to claim your standard deduction on your return.

So, as you can see, claiming separate when married not only carries with it a host of disadvantages, but can prove to be quite a complicated process, as well. It’s important to understand all of these tax issues in order to have financial health for your family.

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