In the United States, every single tax form comes with its own instruction booklet with a detailed description of how long it should take to understand and prepare it.
Take Form 1040, the individual tax return, for example. The 2001 instruction booklet says that it should take three hours, 30 minutes, to understand the form, and 12 hours, 57 minutes, to fill it out.
Talk about a make-work project. I can just imagine the conversation taking place on a Friday afternoon at the IRS office.
"Uh, it's 5 o'clock and I was wondering if I can go home now," Bob asks.
"Bob, that's Form 1040 you're working on, the stopwatch is running, and 84.6 million people are relying on you to tell them how long it's going to take to fill out. Sorry, but you'll have to keep going until it's done."
"Can I take some time off on Monday in lieu of this overtime?" Bob asks.
"I don't think so Bob. We're starting on Form 300X first thing Monday, and my guess is that it's going to take a good 46 hours to fill that one out. Let's talk about this at the end of next week. Oh, and Bob, make sure you deduct 36 seconds from your total time on Form 1040 since we've wasted some time here. See you Monday."
Sure, filling out tax forms can take time, but when it comes to filing a tax return for a child it could be well worth the one hour 32 minutes and 28 seconds or so that it will take.
Here are six reasons why.
1. It creates RRSP contribution room.
If your child has earned any income at all, whether from baby-sitting, mowing lawns, working at the corner store, or from some other source, be sure to report that income. As long as the child's income is $7,412 or under, he won't have any tax to pay, thanks to the basic personal credit. But he'll be granted RRSP contribution room which can be used later in life to create a deductible contribution to a registered retirement savings plan.
2. Get cash back from the taxman.
Once a person has reached age 19, the taxman will offer cash payments in the form of a GST (goods and services tax) credit if his income is below $32,009. This could net your child $213 this year. There's no need to have income to report on a tax return in this case, but it's necessary to file a tax return. In addition, many provinces offer sales tax or similar credits, which could mean cash in your child's hands.
3. Report income that you've split.
If you're one of the thousands of Canadians who has split income with a child, your child may have to file a tax return to report that income. For example, you may have set up an in-trust account to invest money in the name of your minor child. Any capital gains (but not interest or dividends) in that account can be taxed in your child's hands. In the case of an adult child, all income -- regardless of type -- can generally be taxed in her hands. So, report this income on your child's return -- not yours.
4. Claim tuition and education credits.
If your child attended postsecondary school, she'll likely be entitled to a credit for any tuition over $100. In addition, she'll be entitled to a credit of 16 per cent of the education amount of $400 a month of full-time enrolment ($120 a month part time). Up to $5,000 of tuition and education amounts can be transferred to a spouse, parent or grandparent, or can be carried forward for up to five years if the credits cannot be fully used by the child this year.
5. Claim student loan interest.
Your child may be entitled to a credit of 16 per cent of the amount of interest paid in the year or in any of the preceding five taxation years after 1997 on a student loan made under federal or provincial legislation. The credit is available to your child even if you paid the interest on the loan. This credit is not transferable. Your child should receive a statement from the financial institution showing the amount of the eligible interest.
6. Claim moving expenses.
If your child had to move at least 40 kilometres to live closer to school, or to move home again for the summer, he may be eligible to claim moving expenses if he earned income while at school or while home for the summer. Taxable scholarships or other awards count as income here. The amount of moving expenses will be limited to the amount of income in the new location.
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game 2002 and Winning the Estate Planning Game. He is managing director, Tax Smart Services, at AIC Ltd.
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