The end of the school year is approaching, and many students are deep into the job-search routine. If you're fortunate enough to find summer work, your employer should request a completed Internal Revenue Service Form W-4 from you before you start.
The W-4 determines the amount of income tax that will be withheld from each paycheck. If you don't expect to earn enough to create any tax liability, you can avoid unnecessary withholding as well as the need to file a tax return next spring to get the withheld money back.
You are exempt from withholding if you had no income tax liability for 1984 and expect to have none for 1985. Check the box on line 6c that asks if you are a full-time student, then sign and date the W-4 and return it to your employer. Remember to ask if there is a similar form you can sign to avoid state tax withholding as well.
You cannot get off the hook on FICA withholding for Social Security tax. But the exempt status on your W-4 will mean more money in your pay envelope and freedom from the tax-return chore next spring.
Q: I received notification from my mutual fund that I am required to report, and be taxed on, my share of the fund's undistributed capital gains. I have searched a number of tax guides for the logic of this requirement, but without success. It offends my sensibilities to pay income tax on funds that I never received. Your comments would be appreciated.
A: First let me confirm that the notice from your fund is correct. The reason you are required to pay taxes is that the fund doesn't pay them -- and these are realized capital gains subject to tax liability for somebody.
As you said in your letter, the amount shown on the 1099 is "your share" of the undistributed gains; even though undistributed, this amount effectively is allocated to your account on the books of the fund management. And you should add the full amount of the gain -- not just the 40 percent on which you pay tax -- to your cost basis of the fund shares, to be considered when you sell the shares at a later date.
If the fund had paid any tax on these gains -- not so, in your case -- you would take credit for the amount they had paid; and in that case you would add to your cost basis only the difference between what you report as a gain and what you take as a credit.
Q: Either your March 25 column contained a miscalculation or I just don't understand your answer to the question about taxes due on the interest earned by a dependent child. With interest earnings of $1,100 and the required addition of $2,300, the tax table shows a tax of $118 on the total of $3,400, not the $12 tax you mentioned. According to the table, a tax of $12 would mean taxable income of $2,400 to $2,425. Can you explain how you arrived at that amount?
A: The point that you missed -- along with other readers who raised the same question -- is that the child submitting his or her own return is permitted to claim the normal $1,000 personal exemption, even though he may be claimed as a dependent on his parents' return. This is one of the very few cases where a double deduction is allowed.
So if you follow the procedure prescribed for a return filed by a dependent child, you add $2,300 (equivalent to the zero-bracket amount) to the interest income of $1,100 in this case. Then, following the format on Form 1040 -- which must be filed in these circumstances, rather than either of the short forms -- the $1,000 personal exemption is subtracted to arrive at $2,400 taxable income.
Go to the tax table, and voila! Just as you wrote, the tax for a single person with $2,400 of taxable income is $12. If you've been paying tax for the child without claiming that personal exemption -- as another reader reported -- you may now file amended returns for 1984, 1983 and 1982 (as far back as you can go) and ask for a refund for each of those years.