Teenager Who Earns Enough to File a Tax Return May Still Be Claimed as Dependent

Q Our 15-year-old daughter has just gotten a $6-an-hour job. She works 20 hours a week. She is a full-time student, and her father and I support her. How much money can she earn this year before she has to file a separate income tax return? She also receives about $125 each year in dividends from stock she owns. If she files a tax return, may we still claim her as a dependent?

--C.W.

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A According to the Internal Revenue Service, your daughter may have earnings of up to $4,000 before she is required to file an income tax form. However, if she has any unearned income, such as dividends, the amount at which a filing is required drops to a total of $650, regardless of how much of that total is generated by the unearned income.

At the same time, though, your daughter is entitled to deduct from her total income the greater of $650 or the standard $4,000 deduction, even if you and your husband are claiming her as your dependent.

So, let’s do some quick math. At $6 an hour for 20 hours a week and 52 weeks a year, your daughter would earn a maximum of $6,240 this year. With her dividends, total income would be $6,365. With the $4,000 exclusion she’s permitted, that leaves a maximum taxable income of $2,365. At 1996 tax rates, she would owe about $350 in taxes.

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Q About four years ago my business suffered an embezzlement by an employee who ran up huge debts on the company’s credit cards. I have not used the cards since. However, I have been saddled with the debt. I have been trying to pay it off but am able to pay only the minimum amount owed on each card. As a result, the balance has barely been reduced. Is there any way after all these years to have this debt forgiven or erased? I don’t know how much longer I can afford to make these payments. It doesn’t seem fair for the card issuers to continue charging compound interest and penalties in this situation.

--A.M.

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A There are two avenues you can pursue, one dramatic, the other less so.

A bankruptcy filing would erase your debt, or at least allow you to pay a negotiated share of it, depending on the type of petition you file. Either way, the filing would tarnish your credit-worthiness for years and could stigmatize you among friends, co-workers and family members. A successful petition would take about three to six months to complete.

Or, if this is possible, you should consider paying off your credit-card debts by taking out a mortgage on your home. Home mortgage interest is usually deductible on your income taxes, and rates are usually considerably lower than those charged by credit-card companies. If you are in dire financial straits, you may not be able to qualify for an attractive home mortgage.

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Q My mother added my name to the deeds of two properties she purchased more than 20 years ago with her own money. Will this rule out my ability to inherit the properties with their value as of her date of death as my tax basis?

--J.W.

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A Our experts say that if your mother used her own money exclusively and has merely added you as a joint tenant for estate-planning purposes, the tax basis of the fund investment will be treated as a full step-up to its value as of your mother’s date of death. That would significantly reduce your exposure to taxation on any gains when you sell. If, however, you are truly joint tenants and jointly invested in the properties, the tax basis of only her half of the asset will be treated to the step-up, and the basis of your half will remain unchanged.

If your mother is truly the sole source of the money invested, it shouldn’t matter whether the properties are in her name alone when they pass to you, our experts say. Of course, you should be prepared to prove this position, because the vesting certainly implies otherwise. But if you can prove it, you are better off leaving the situation unchanged, because the joint tenancy vesting allows the asset to bypass the probate process, thereby speeding its transfer to you.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, e-mail [email protected]