Do You Really Need to File a Tax Return?

Today, we'll be discussing, do you need to file a tax return for yourself or for your child? Hello and welcome to Money Talks. My name is Ken Wink from Summit Financial Consulting. If you'd like more info about what you hear during our show today, feel free to give me a call. 586-226-2100. And it's not just me here at Summit Financial. We have seven financial advisors in the office. We've got a deep bench of people that are here to help and answer questions any way that we can. You can also check us out on the web at summitfc.net. While you're at the website, I highly encourage you to check out the podcast page. You can see our past shows and also subscribe on all the best podcasting sites. So almost every show, I try to make a point to mention that if a young adult between the ages of 16 and 22 just saves $1,000 a year, that will eventually grow to $5,000. especially if you can put it inside a Roth IRA. So that's a pretty amazing number. I just opened up Roth IRAs for both of my kids and now they are contributing monthly into them. And to contribute to a Roth IRA, you have to be able to work. You have to be able to show income. So now that my kids are showing income, you know, they have jobs now. Do they need to file their taxes? And what happens if you're disabled? Do you have to file taxes? And what happens if you're a senior and living off a relatively low income or tax-free distributions, or maybe you're just living off social security? Do you have to file? We are going to answer all those questions in today's show. Before we jump in, let me introduce my co-host, Tony Shore. Tony, So Tony, we were talking about this before the show. You're suffering from some allergies or a cold. I have a cold. I might actually have COVID. I don't know what's going on here. I just want our listeners and viewers to know that the Money Talks team here is just fighting the good fight today for them to make sure that there's some good information shared, even if we're not 100%.

We're going to power through. And Ken, you always have great information. And I love it that we're here despite my allergies, my voice, and I'm a bit congested. You might even have COVID. In fact, I think you actually said, I want to clarify, you gave some stats earlier. And you said if a young adult saves $1,000 per year for just six years between the ages of 16 and 22, that could potentially grow to $500,000. I think you said $5,000. Oh, I did, yeah. That's a brain fog. And that makes a huge difference. People are like, wait, only $5,000?

Only $5,000? What's that? No, you invest $6,000 and you end up with $500,000. $500,000. That's crazy.

That's huge. And that was just the COVID talking cat. Don't worry about that. Yeah. I'm not here just to point out your mistakes, but I do enjoy it. Between the two of us, we will create a halfway decent show today. I'm sure of that. We will. We will. So you had a question for me about filing a tax return. You got to ask me that question there.

Yeah, so if you don't file taxes, you could get into trouble with the IRS, right? So I was asking you, have you ever been audited by the IRS or have you been a good boy overall?

Well, those are two different, one doesn't necessarily have to do with the other. Just because you haven't been audited doesn't mean you, it's like, have you ever been convicted of a felony? Never convicted. No, that's that's an old that's an old that's from stripes. When they were trying to enlist in the army, they asked they have to fill out the forms. And the guy goes, have either of you ever been convicted of a felony? They kind of look at each other. Never convicted.

Was that Bill Murray or Harold Ramis?

Harold Ramis. Yeah. Or John Candy. He was on there, too. No, but it was Murray and Ramos who were trying to get into the Army. Well, you know what? I have never been audited. And none of my family members have ever been audited. I've been a good boy. My mom was a CPA and did bookkeeping for small businesses in our little town. And so she did my taxes my entire life. And my wife and I's taxes for the first six years or actually the first probably almost 10 years that we were married. I didn't know your mom was a CPA. That explains why you're such a genius. Well, it skips a generation. My kids are geniuses. But no, I've always been a good boy, but she was great. If you have somebody that's really good with taxes and cares about you and willing to spend the time, I'm not just talking about going down to these little... stands that set up in a Walmart or something. I'm talking about somebody you know and trust who will spend extra time. She was able to really do a good job for us on our taxes. Like, oh, no, you can write that up. And this is before the age of the standard deduction, the large standard deduction. So we used to itemize, worked out of the house. You know, I worked in the music business for a record company and I could write off Part portions of music purchases, subscriptions to Billboard magazine, things like that. So that was those were the good old days. Now we have a nice big standard deduction. So that's good. But I've never been audited. And I don't want to know what that would feel like. I think it would leave a mark.

Yeah. Yeah. I know. I'm a good boy, too. I do things, do things by the book. I don't have time for that.

No, no. Nobody has time for that. Yeah.

Yeah. So before we before we jump into all the numbers, you know, and to answer the title of the show today, I just wanted to really quickly let everybody know what the difference is between what is income and what is not income. OK, so there's two types of income. There's taxable and non taxable. So taxable is basically anything that's not non-taxable, but it's most commonly payment for work or earnings and investments, basically stuff that's not inside a retirement account. Non-taxable includes a lot of stuff. So gifts and inheritances, child support, alimony payments from a divorce after 2018, government welfare, life insurance, death benefits, lawsuit compensation, workman's comp, municipal bond interest, veterans benefits, like disability and education benefits. So those are all the non-taxable income stuff. And then there's some stuff that's gray, like social security. If you're only income social security, then it's gonna be tax-free, but if you've got other income, then social security can be taxed up to 85%. That's sort of a topic for another show. Qualified Roth distribution. So if you were over the age of 59 and a half and you held the account for at least five years, that's going to be tax free. And then lastly, I just want to mention that scholarships and grants, if it's used for tuition or fees or required books, then it's good and it's tax free. But room, board and personal expenses all do count as taxable income. So even within the college expenses, there's different categories. So it's a little bit complicated. So I wanted to make sure I sort of pointed out that before you figure out whether you have to file taxes or not, you have to know whether your income counts as taxable income or not.

Sure. I'm glad you explained that before we jump in. But the real question here that people want to know is, do I have to file tax returns for my children? And at what point do they have to file tax returns?

Yes. So talking about my kids specifically, if you've got $400 or more of informal work. So this is like babysitting and lawn cutting and cleaning services or chores. The very first business that I started, Tony, I have told very few people about this because it's funny and embarrassing. But the name of my first business was the Handy D&D Weed Whacker Dudes. Of course it was. So me and my neighbor would go around to all the houses in the neighborhoods and say, do you have any areas that you want us to weed or weed whack for you? And a lot of neighbors took us up on it. They would say, hey, this garden is terrible. You know, go go through there and pick all the weeds out. So we were generating income at a young age. So, you know, to be able to contribute to a Roth IRA, you have to have income. So my kids are going to have to file a tax return because they're getting more than the income that they're receiving is informal work like this. So because it's over $400, they do have to file an income tax return and they are probably going to have to pay some self-employment tax because they're self-employed doing these chores and everything else.

Well, and a lot of people might think, hey, $400, we're not going to bother with that. Or even some people might say, my kid only earned $1,000. Let's just sweep it under the rug, as you say. But you make a great point. One, there's a couple reasons not to do it. Number one, it's not legal. You have to report. You're supposed to report. And two... You can't contribute. You should, if your kids are earning money, you should be making them contribute to a Roth, in my opinion. That's for my kids. So they need to start reporting income and getting used to paying those taxes, putting the money they earn into a Roth, and letting it grow. I like that point you made there. That's a good one.

Taking some portion of what they're making and teaching them about savings at a young age is, is really huge. And then, you know, I opened the show with that stat that just not the largest dollar amounts, they add up to be a tremendous amount potentially when they go to retire. So the sooner you start the better, but go ahead.

I have a question though, that there's something contradicting here. I thought that the rule was if you're single and, And you're under the age of 65, you can earn up to $16,000 and not have to file for taxes.

So it depends on whether it's W-2 wages or if it's informal work. So if it's over $400 of informal work, then we got to pay those self-employment taxes. But if you're working at Taco Bell, you know, you're going to have a W-2. They're going to automatically take out all the appropriate taxes. Right. So it's that self-employed tag that gets you into trouble.

Sure. Yeah, that makes sense. That makes sense. But the Roth, I mean, let's focus on that. Why would you bring up the Roth? What does that have to do with whether or not I should pay taxes or my kids need to file? Because Roths, like you said at the beginning of the show, if you put money in,

how quickly it can grow, even over what, you six years it could grow to five hundred thousand, or yeah, just contribute for six years, and my retirement time it'll be my retirement. Yeah, I have I have clients call me all the time and say, hey Ken, great news, I'm retired. Um, I've got more money coming in from various sources than I than I need. I'd like to start saving towards a Roth. Sorry, you can't. You're retired. You have to have earned income to put money into a Roth IRA. So unless you have earned income, you cannot contribute. So that's the thing. If you just put money into a Roth IRA for your kids, but then there's no evidence of them making any money on file with the IRS, when the kids go to take the money out, It could potentially cause problems as well, especially if they take it out within five years or if let's say they are getting married or they're trying to buy their first house and they want to take some money out of the Roth. With a Roth IRA, you can take out your contributions at any time for any reason tax free. But if you never told the government that you made the contributions, it could be an audit waiting to happen. It could be a tax bill waiting to happen. Now you're going to go back 5, 10, 20 years and try and amend your tax returns to say that you did work back then and you did contribute to a Roth. But now you've got penalties and interest because you didn't report the self-employment income all the way back there. Just do things the right way. File an income tax return for your kids if they're working. I would say in any case, because we want to do things by the book, but especially if you plan on investing on their behalf into a Roth IRA, you just got to file that income tax return, in our opinion.

Yeah. Well, yeah, and that's really important. I think people, you need to, you're teaching your kids a lesson if you get them started and explain why they have to do this. That way, when they get their first full-time job and they get their check, they're not like, whoa, I needed, I planned on having more for rent or for this or thought I could buy this. They can see, oh, taxes have to come out, right? Yeah.

Yeah. Yeah. And I know you've talked about it in past shows like there are family members like I don't want to single anybody out, but I thought you were telling me a story about how one of somebody you knew like was saving and was. putting money towards retirement, was preparing to buy a house, and then somebody else you knew bought an engagement ring before they even got a job yet. It's like, you know, there's many different styles to handling your finances. Yes, there are. I think the more of a head start you give these kids to be wise about their money, the better. And, you know, another topic for a show that Zach did a couple of months ago was just about also teaching them to set money aside for those less fortunate than you. Setting money aside for church or charity or, you know, teaching people how to give back, I think, is really important, too. But that's a topic for another show.

Yeah. Yeah. I mean, but taxes and young people or taxes and our children, whether there are adult children that still need help with finances or if you start them early like you are and they're earning, they have some earnings, it does pay to do it right and teach them the right way. Right. Right.

Yep, absolutely. Yeah, with my son, I had him with Jack. I made him save money. I didn't make him save money, but I heavily guilted him. Whenever her birthday's Christmas, he was doing chores around the house. I'm like, buddy, you got to invest some of this money. You got to save it, you know, in case you want something in the future. So he did. And we did save up quite a bit of money. And he did get some growth in the stock market because I was thankfully doing a good job investing it for him. past performance can't predict future performance, Jack, sorry. But there's my disclaimer. But yeah, it grew and he ended up buying a pretty expensive gaming computer with it. And he saw the benefits of saving and not using debt and the power of investing. So even though I'm a little bit bummed that he almost completely cleaned out his account with that purchase, at least I'm hoping taught him a lesson about how to save for things and not pay for it on credit and then you know, owe somebody monthly payments for months and months and months or years and years and years. The bank of mom and dad luckily don't charge very high interest, but you know, when he gets to college and those credit cards start popping up as an opportunity to spend money that he doesn't have, I'm hoping all these kids will make the right decisions, but we'll just do our best.

Right. And also with, like you said, invested, he invested if he has unearned interest or dividends, capital gains. If you have $1,300 or more of that, you should file, right? You got it.

Yeah. Yeah, so there's lots of different ways that you can get into a position where you do got to file an income tax return. If you're not sure, just talk to a tax professional. We have people that we can hook you up with here. Just give us a call at 586-226-2100. That's an easy question. We're not going to charge you anything for it. You know, we're just trying to help as much as we can. But to sort of refocus here, getting back to the tax brackets, we've talked about kids a lot. I want to now talk about adults. Oh, okay. You mentioned it earlier. If you're single and under the age of 65, you can earn up to $16,100 and not have to file taxes, assuming you're not self-employed and doing chores around people's houses.

The weed whacker boys or whatever you were called.

Handy dandy weed whacker dudes. Dudes. Okay. Yeah. Of course, yeah. It was the Ninja Turtles era. Forgive me. If you're single and over the age of 65, you can make up to $17,900 and not pay taxes. I should say not have to file taxes. And then if you're married and filing jointly and under the age of 65, you can earn up to $32,200 and not have to file taxes. But interestingly, if you are married and you're filing separate, so maybe you're like preparing to go through a divorce or something like that, the threshold drops to $5. So if you have more than $5 of income, you have to file no matter what if you're married filing separately. Okay. And then lastly, if you're 65 or older, you can earn up to $34,850 if one of you is over the age of 65. And if both of you are over the age of 65, then it's up to $37,500. So being over the age of 65 gives you a little bit of more runway before you have to file those income taxes.

Wow. Wow. Yeah. And then if you do file, then you the standard deduction is such that, you know, you know, it should be for a lot of people. You're not going to have to pay in any taxes if you don't.

You know, I mean, if you're working and had money taken from your paycheck for taxes, there's a good chance when you're on the low end. Yeah. Filing your taxes is going to be a great benefit because you're going to get a refund. Obviously, every situation is different, but it doesn't hurt to talk to a tax professional and see if you're going to get some money back.

Well, you say it doesn't hurt to talk to a tax professional. Talk to a tax professional. I don't think there's an option there. You really need to talk to a tax professional and have a financial advisor who's looking at your big picture, who can do future tax planning. Because you and your tax professional might do something that will save you in taxes this year, but cause a problem later down the road when you're in retirement or in your later years. So make sure you're working with a trusted financial professional. So before we go, Ken, give that phone number and email address again.

Sure. It's 586-226-2100. And you can reach us at info at summitfc.net or on our website, summitfc.net. One last thing I almost forgot, Tony, if you are disabled, You may or may not have to file taxes. It depends on what kind of disability you have and what kind of income you have coming in. So real quick, if you've got Social Security disability insurance, it depends. If you're combined income, I'm sorry, if you're single, then it's $25,000 is the threshold. And then if you're married, filing jointly, $32,000 is the threshold. If you have a employer-paid disability, sort of like a pension, like monthly income coming in, Yes, it's taxable. Yes, you're going to want to most likely file. And then if it's workman's comp or veterans benefits, no, it is not taxable. And that doesn't count towards those thresholds. So, again, every situation is different. Depends upon how you're disabled, who's paying you. We'd be happy to talk it over with you to see whether or not you need to file.

So many rules. You got to work with a professional. Don't try to go it alone. And Ken, great show. Wow, you crammed a lot of information into today's show. For a guy who might have COVID, that's huge. You powered through. And for our listeners and viewers out there, contact Ken and his team at 586-226-2100. That's 586-226-2100. Or just go to SummitFC.com. And that does it for today's episode of Money Talks with Summit Financial Consulting, LLC, and our host, the man with the plan, Ken Wink. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.