The separate income tax returns of parents and their dependent children are sometimes intertwined. The choices made on one tax return may have an impact on another return. Parents can ensure that their family obtains the most favorable overall tax treatment by instructing dependents on how certain deductions should be claimed.

Teenagers typically enter the workforce by working at part-time or seasonal jobs. After taxes are withheld from their earnings, teens and young adults often file tax returns early simply to receive a refund of their withholding. However, a tax return improperly filed by your dependent could hinder your own ability to file an accurate return.

No extensive plan is required to inform your dependent how your tax returns are to be coordinated. All that is needed is a brief conversation focused on the tax commonalities. The primary subject of discussion should be your dependent's personal tax exemption. If your dependent is a college student, you may also need to discuss the American opportunity credit.

Only one personal exemption allowed

A personal exemption is a specific dollar amount that reduces taxable income. However, an individual who is claimed as a dependent cannot claim their own exemption. Although a dependent can claim the standard deduction, they are often surprised to learn they cannot claim their own exemption. For your dependent, the loss of the exemption could result in an increase in their income tax.

The exemption for a dependent is generally more advantageous to the parent, who is likely to be in a higher tax bracket. If your dependent child earns less than their standard deduction amount, the exemption is not even needed, since the standard deduction alone reduces their taxable income to zero. In contrast to the federal tax rule, many states allow a dependent to claim their own exemption for state tax purposes.

Flexibility in the American opportunity credit

If you claim an exemption for a student attending a college or university, only you can claim the American opportunity credit (AOC) for that dependent. It is usually more advantageous for the parent of a college student to claim the AOC because a portion of the credit is used to offset income tax.

If a parent chooses not to claim a dependent student for some reason, only the student can claim the AOC. For example, a parent may choose not to file a tax return if their income level is less than the filing requirement threshold.

The coordination of multiple tax returns is often best performed by a tax preparer who knows your family situation. Contact a certified public accountant at an accounting firm like Vlasac John M & Co for further assistance in tax return preparation.