Tax Tip of the Week
June 19, 2006

• Sally will owe taxes on her earnings, just like any employee. But in practice, she might end up paying zero or very little tax. She can use her standard deduction to offset the first $5,150 she earns for this year. After that she’ll pay taxes at a 10% rate on the next $7,550 of earnings.
• Usually, Sally will have income tax withheld from each paycheck. She’ll fill out a Form W-4 when she starts work. That will determine how much tax is taken out. If she doesn’t plan to work full year, she might want to claim an extra withholding allowance on the form to reduce the taxes withheld.
• She’ll also have payroll taxes (social security and Medicare) taken from each paycheck. These will count towards her lifetime social security earnings record.
• Generally, you can still claim Sally as a dependent on your tax return even if she takes a standard deduction for herself. That assumes she still meets the usual tests for a dependent, including age (under 19 or under 24 if she’s a full-time student), living with you for at least half the year, and you providing at least half her support.
• Sally can’t claim a personal exemption for herself if you are entitled to claim her as a dependent on your return.
• Sally should file a tax return for 2006. That will ensure that she receives a refund of any excess taxes that were withheld. There are limited exceptions; contact our office for details.

Questions for our Financial Expert?
E-Mail us at: finance@ClevelandSeniors.Com