Taxpayer asks:
Hi,
My husband and I have decided to open a bank account for our son. We’re going to give him an allowance every week. He gets to keep part of it and put the rest in the bank. If he saves a certain amount, he gets a bonus allowance. The point is to teach him to save.
My question for you is how do we report the money we’re giving him? And does he need to file taxes for the bank account? He is 8 years old and his allowance is $5 per week.
Taxgirl says:
What a great idea! I may have to try that one myself…
There are no income tax consequences to your son for an allowance; similarly, there are no income tax consequences to you for giving an allowance.
Technically, there could be gift tax consequences since an allowance is really a gift – but doing the math here, I’m guessing it’s rare that, together with your other gifts to your son, you hit gift tax type numbers ($13,000 per person per year for 2009).
As to the bank account, interest reported to your son might be subject to income tax. However, the amounts that you’re talking about are small enough that they likely won’t be… Assuming that you claim your son as a dependent and he has no earned income, he can earn up to $950 in unearned income (like interest and dividends) income tax free for 2009 for federal purposes. That amount is the equivalent of the personal exemption. There’s no need to report that income or file a return.
The next $950 would be taxable at your son’s own tax rate. After that, using the “kiddie tax” rules, he would be taxed at your (meaning his parents’) marginal tax rate. It sounds like neither of these situations would apply to you but I wanted you to be aware of them.
There are additional rules and exceptions which apply to the “kiddie tax” rules – I’m not going to discuss them here other than to say that the rules are much different if your child has earned income or significant unearned income. If that’s the case, you’ll want to consult with your tax professional.
It’s also worth pointing out that these are the federal rules – your state may have different rules. Again, consult with your tax professional.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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Taxpayer asks:
Hi Taxgirl,
I seen you on Good Day Philadelphia today, and I’m glad there is someone out there that really knows what she’s talking about. I recently received a medical settlement the last week of December in 2008. The settlement I received was under 90,000, I don’t know if I have to pay taxes on this or not. I have three kids, so I immediately put money up for my kids. I paid my student loan off, & got current on some debt. I went to a credit counselor last month, & was informed I wouldn’t have to pay taxes, because it’s a medical settlement & not settlement from lottery, or property. Please I hope you can help! I didn’t know who to turn to or who to trust, in fear of being ripped off. I haven’t done my 2008 taxes yet….& I only have about $40,000 left which I put into a CD & money Market account. I even ask the bank Manager, she stated the bank will send me a tax form at the end of the year explaining the interest I earned on the money in my account, & I would have to report that…… I was so stressed before this settlement came , because of debt, & didn’t know if I should eat, or keep a roof over my head. But now I feel more stressed not knowing if I owe the Government…..
Thank you,
Taxgirl says:
I would highly recommend that you check with your tax professional or an attorney to have them review the settlement proceeds. How the settlement is characterized will determine whether it’s taxable. Here are some general rules for federal purposes:
To the extent that the settlement is for physical injuries, it is not taxable to you, assuming that you have not previously deducted those expenses. If you had already deducted the expenses, then they are includable as income to the extent of your deduction (i.e. part of your settlement is to reimburse you for a doctor’s visit and meds, if you already deducted the meds, you must include that portion as income on line 21 as “other income”).
Punitive damages are taxable: it does not matter if punitive damages are related to a physical injury or physical sickness.
Emotional distress or mental anguish damages are taxable to the extent that they exceed medical costs for treatment. As with physical injuries, any of the medical costs that were previously deducted must be included as income on line 21. You should also attach a statement to your return which clearly states the amount of the entire settlement less related medical costs.
Employment discrimination or injury to reputation damages are taxable.
Payments for property loss or loss of use are taxable as capital gain to the extent that they exceed your basis (cost) of your personal property; report those on Schedule D of your form 1040. If the payments are less than your cost, they are not taxable.
Interest earned on the settlement, as you were told, is also taxable. Report that on line 8a of your form 1040.
Again, if you’re not sure how your settlement was structured, check with your attorney. He or she should be able to explain it to you. Good luck!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
The 1099-INT instructions state, payers of interest of $10 or more are required to furnish you and the IRS with this tax information. The IRS is notified of all interest paid by financial institutions on magnetic media, but financial institutions only report interest of $10 or more. I have seen some sites state, “If you do not include your interest income on your tax return the IRS will know when their computer system matches your tax return to the tax information provided by payers.” Which I believe is incorrect because if payers/financial institutions only report interest of $10 or more then how will the IRS or their computer system match your tax return to a 1099-INT reporting less than $10 when such a 1099-INT was not provided to the IRS?
I have yet found an IRS document addressing the individual tax filer if they are still to report interest less than $10. Are individuals to report interest less than $10 even though payer does not provide a 1099-INT to the IRS?
Taxgirl says:
The $10 threshold is supposed to be for the sake of administrative ease. The tax associated with interest of $10 or less is so insignificant that reporting this interest is not required by the financial institution.
That said, some financial institutions find it administratively more efficient to run all of the reports, regardless of the amount. The bank that holds my children’s passbook savings accounts (yes, they still exist – and the kids love the passbook!) issues a 1099-INT for each of the accounts every year despite the fact that the interest is only a few dollars.
If I receive a 1099-INT, I always report it, regardless of the amount. I can’t imagine why you wouldn’t – it’s easy enough to include it and that way, all of the numbers match up on the return with what the IRS has on file.
If you are required to file a tax return, you should report all income from all sources whether you receive a corresponding form or not. So, regardless of whether you receive the form 1099-INT, you should report the interest. Again, the tax consequence of doing so is quite minimal.
All of that said, I have never heard of a client who was audited for not reporting interest less than $10 which was reported on a form 1099-INT. This doesn’t mean that it hasn’t happened, just that I haven’t heard of it. I personally wouldn’t recommend it – you are responsible for reporting the interest irrespective of the amount and I’m not sure why you would risk having your return potentially flagged over less than $10.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
