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Do not let your college kid’s earned income lower your tax refund

Every recent year I witnessed parents with kids who receive W2 losing important deductions and credits because the kids file and claim themselves. This is a common mistake that can result in significant financial loss and missed opportunities for tax savings.

Know Your Best Option

When a child receives a W2 from an employer, they have the option to file their own tax return and claim their own personal exemptions, deductions, and credits. However, in many cases, it is more advantageous for parents to claim their children as dependents on their tax returns. This is because parents may be eligible for certain tax benefits that are not available to children who file their own returns.

Reduce Tax Liability

For example, parents may be eligible for the Child Tax Credit, which can reduce their tax liability by up to $2,000 per child. Additionally, parents may be able to claim the Earned Income Tax Credit, which is a refundable credit that can provide a significant financial benefit for low-income families.

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These tax benefits can be lost if the child files their own return and claims these credits.

Deduct Certain Expenses

Another important consideration is the loss of deductions. Parents may be able to deduct certain expenses related to their children, such as medical expenses, education expenses, and childcare expenses. However, if the child files their own return and claims these deductions, parents may lose the opportunity to claim them on their own return.

If parents paid for their child’s college education, it makes the most sense to claim the child on the parent's return so Education Credit can be earned up to $2,500 along with a $500 Child Tax Credit.

Do What Makes Sense

In some cases, it may be advantageous for the child to file their own return and claim their own exemptions, deductions, and credits. For example, if the child has a high income or if their parents are not eligible for certain tax benefits, it may make sense for the child to file their own return. However, this decision should be carefully considered and should be based on the specific circumstances of each family.

It should be due diligence for tax preparers to ask college students questions regarding their living and education situations so that the best tax advice can be provided to them without costing their parents’ tax refund.

Work Together As A Family

In conclusion, parents with children who receive W2 should be aware of the potential loss of tax benefits if their children file their own tax returns and claim their own exemptions, deductions, and credits. It is important to consult with a qualified tax professional to determine the best course of action for each family’s unique circumstances. By working together, families can maximize their tax savings and ensure that they are taking advantage of all available tax benefits.

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Rich Schwartz and his CPA firm serve clients throughout Southern New Jersey. Rich has experience working with businesses providing trusted advice, financial solutions, and guidance to help them manage cash flow, plan for the future, and grow their businesses.

Rich has worked with hundreds of businesses across a variety of industries including medical, professional services, financial services, retail, manufacturing, distribution, and real estate. He has the ability to understand the unique challenges facing small business owners and the experience to provide the right solutions.