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Thread: what is the first year loophole?

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    what is the first year loophole?

    HI everyone!
    I just started dancing, but my parents don't know that. Don't worry, I am 21! My parents still claim me as a dependent so I have not yet figured out how to pay taxes without them knowing what I do. Any suggestions on how do deal with the taxes legally and secretly? What is the first year loophole? Does it mean I get to work a year tax free?

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    Default Re: what is the first year loophole?

    gosh, no, if it were the case though!

    you still have to pay taxes on any and all income you make, but the first year loophole is in regards to making quarterly payments versus one lump payment on Apr 15th. Normally you can't do the latter without paying penalties and interest, but you can avoid the penalties and interest for the first year.

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    Default Re: what is the first year loophole?

    Suzie, the big 'hurdle' you're going to face is earning too much money for the IRS to legitimately allow your parents to claim you as a dependent. In other words, if your parents send in a tax return with a $40,000 taxable income claiming you as a dependent, and you also send in a tax return with a $20-30-40,000 taxable income showing that you're not claiming yourself on your own tax return because you are being claimed as a dependent on someone else's tax return, aaa-ooo-gah.

    Now if your parents' income was $100,000 and your own income was $10,000 odds are that the question would never be asked. But if your own income is more than 1/2 of your parents income, it's fairly probable that the IRS may question their attempting to claim you as a dependent. If this happens, not only are your parents going to find out that you've been working as a dancer, but they may also get a bill for extra taxes themselves by having attempted to claim you as a dependent when they are no longer legally entitled to do because you are providing more than 1/2 of your own financial support.

    You mentioned that you just started dancing. If you didn't earn money as a dancer before January 1st, you do not need to file an income tax return this April 15th. All yiou need to do is file and pay estimated income taxes on your earnings between January 1st and April 1st. However, on April 15th 2006 you will have to file a tax return for all of your 2005 earnings. Realistically, if you didn't work in 2004 your parents' taxes are not going to be affected this year. However, in fairness to them, you may seriously want to consider telling them what to expect in the way of losing a dependent on 2005 taxes so they can change their own tax withholding accordingly for the rest of this year.

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    Default Re: what is the first year loophole?

    IRS code quote time:

    Generally, in order to claim a person as a dependent, that person may not have gross income of $3,100 or more for the year. But, a taxpayer's child who has not attained age 19 or who was under 24 and was a full time student at a regular educational institution or was pursuing a full time, accredited, on-farm training course during each of five calendar months in 2004 may be claimed as a dependent, regardless of the amount of the child's income. The five calendar months need not be consecutive.

    If you were a student for 5 months, you can get away with allowing them to claim you as a dependent and you can file your return as such however, you will most likely pay more taxes as a result.

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    Default Re: what is the first year loophole?

    If you were a student for 5 months, you can get away with allowing them to claim you as a dependent and you can file your return as such however, you will most likely pay more taxes as a result.
    Crackeur, despite the full time student loophole on an eligible dependent's age, it does not alter the fact that another component of dependency is someone else providing more than 50% of their financial support. Therefore if the parents report $100k of income while the student reports $10k in income plus $10k plus in tuition expenses, there will be no question on the part of the IRS. However, if the parents report say $40k, and the student reports $20k or more in income plus $10k in tuition expenses, there's a significant risk the parents will fail the 50% test.

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    Default Re: what is the first year loophole?

    notice the word generally that starts the IRS's code on dependents.

    Truth is, the tax loss by allowing the parents to claim the dependent isn't worth it.

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    Default Re: what is the first year loophole?

    Truth is, the tax loss by allowing the parents to claim the dependent isn't worth it.
    Absolutely true. To parents filing jointly with a $40,000 income, the extra dependent might be worth a $1000 reduction in income taxes ... if that much. On the other hand, to a dancer filing single with a $40,000 income, who doesn't own a house with a mortgage, the dependent claim would be worth more like $3,000 in income taxes. Thus if this girl decides to persevere on not informing her parents about her dancing, it's going to cost her at least $2,000 for the privelege - and still subjecting herself as well as her parents to increased risk of an IRS audit.

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    Default Re: what is the first year loophole?

    if they cross reference the ssn, the parents will simply get a notice that they cannot claim her. when they ask her about it she's going to have "a lot of 'splainin' to do"

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    Default Re: what is the first year loophole?

    if they cross reference the ssn, the parents will simply get a notice that they cannot claim her
    true but incomplete ... the parents will also receive a notice that their tax refund will be reduced by $1000 or that they need to send in a $1000 check along with the notice disallowing her as a dependent !

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    Default Re: what is the first year loophole?

    um, when I said they'd get a notice claiming they can't claim the child, they'd be sending that notice along with the notice regarding the changes. That was a given.

    I can't recall the last time I saw an IRS notice that said you can't do something that was't accompanied by a notice of determination of additional taxes due.

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    Default Re: what is the first year loophole?

    Using my experience as a Voluteer Income Tax Assitance (VITA) tax preparer, one of the biggest misconception that the general public has on the dependency issue is that it is some kind of choice IE "I let my parents claim me" or in the case of claiming dependent kids in the case of divorce" The tax codes are very specific in what the "depenceny tests" are and also clearly state the you can not claim someone as a dependant if they or someone else can claim them then as there dependant. If the person that can claim the other person chooses not to for whatever reason that does not mean that someone else then can. in that case then no one does.

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