Author Topic: Tax advice for a college student  (Read 1481 times)

Grif

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Tax advice for a college student
« on: June 28, 2016, 04:08:18 PM »
Hi there, I'm not a newb to mustachian principles but I'm a newb to actually carrying out some of the financial strategies if that makes sense.  I'm looking for advice on how to plan for having a job and which type of IRA to consider. I'm also trying to understand what income taxes look like paycheck to paycheck.

So first what I'm trying to understand is which IRA is better right now. Right now I'm a dependent, and I make money under the table doing yardwork and painting, usually for my big family. From learning from the Mad Fientist and from the suggestions of Jim Collins, a deductible IRA is definitely better in the long run. However, In my college years I'll have a low income, which suggests a Roth will be better. My main question is at what income level do I finally pay income tax? Does the standard deduction apply to me? Or the personal exemption? Also, I will probably make enough under the table this year to have to file taxes, and I'm fine with doing that, but since it'll only be a few grand, won't the deductions just cancel it out? Or since I'm a dependent, those don't apply? I'm just not sure. I kind of need help seeing this demystified.

My final question is about paychecks (I've never had a big boy job, I know, I know.). So what I know is that when you get your wage, taxes are taken out of what you get. Come tax time you see if the government took too little or too much and see if you get any returns. Lets assume I made 10k that year. Standard deduction and personal exemptions hit 10k. Come tax time would all of the money that was taxed be paid back (except FICA tax I believe)? If that's the case, yeah a roth IRA seems better.

Thanks

Edit: Exactly what I wanted to know.  I had a feeling the standard deduction would apply (apparently not the personal exemption) that would lower my income tax (not FICA though). Not sure how I'll consider the money I earned because a lot of it was in the family. Thank you guys n gals.
« Last Edit: June 28, 2016, 09:36:40 PM by Grif »

GizmoTX

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Re: Tax advice for a college student
« Reply #1 on: June 28, 2016, 04:48:37 PM »
You have to earn money to fund an IRA; you'll need to file a return to substantiate this as well as earn Social Security credits. If you earned more than $6300 during the year, you must file a tax return, even if you are a dependent according to IRS rules (even if you are paying all your expenses, the IRS considers you a dependent of your parents until you either graduate, are in the military, or are married). If less, & a dependent, your parents declare your income.  If you were self-employed for some portion of the tax year and earned more than $400.00 during that self-employment, you will also have to pay the necessary self-employment tax (Social Security and Medicare). This is what is usually withheld if you get a paycheck from an employer. Use one of the free online tax calculators to check your situation.

At this point a Roth is better for you; you likely don't make enough to use a tax deduction & the Roth accumulates earnings tax free. Later on you can add a deductible IRA to your portfolio.

teen persuasion

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Re: Tax advice for a college student
« Reply #2 on: June 28, 2016, 08:15:24 PM »
You have to earn money to fund an IRA; you'll need to file a return to substantiate this as well as earn Social Security credits. If you earned more than $6300 during the year, you must file a tax return, even if you are a dependent according to IRS rules (even if you are paying all your expenses, the IRS considers you a dependent of your parents until you either graduate, are in the military, or are married). If less, & a dependent, your parents declare your income.  If you were self-employed for some portion of the tax year and earned more than $400.00 during that self-employment, you will also have to pay the necessary self-employment tax (Social Security and Medicare). This is what is usually withheld if you get a paycheck from an employer. Use one of the free online tax calculators to check your situation.


At this point a Roth is better for you; you likely don't make enough to use a tax deduction & the Roth accumulates earnings tax free. Later on you can add a deductible IRA to your portfolio.


The bolded part is closer to the FAFSA definition of a dependent.  If you provide over half your own support, you are not a dependent for IRS purposes.

OP, working under the table usually implies that you don't intend to report the income to the IRS so it is not taxed (not the proper way to do things).  The term you actually want is self-employment income.  You are intending to file taxes and claim the cash income you earned, as a way to document that you HAVE earned income and are eligible to contribute to an IRA.

If you are a dependent, you will get your standard deduction for a single, but you won't get to claim a personal exemption; your parents get to claim that for their dependents.  You will owe SE tax on your earnings, but if your income is less than your standard deduction you won't owe federal income tax.  Your state may also tax you, they are all different, and some states have no income tax.


If your income tax is zero or very low, a Roth IRA is a good option.  Just remember that even a traditional IRA will not reduce your SE tax, only the income tax portion.

 

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