If someone (we'll call them David) is over 18 but a dependent (parent) and co-founder of a C-corporation (no payments or sales yet), how would this play into their taxes and the taxes of the person claiming them as a dependent?
David qualifies as a dependent but has a gross income of above $3000. Working a job/internship is ~$2000, ~$1000 is from a scholarship (taxable because it is received to be used as payment for services required as a condition for receiving the scholarship), and dividends are another ~$200.
How much of this is unearned vs earned income?
David would be receiving some founder's stock from the corporation as well, so it is recommended to file an 83(b). Would this be put under David's name? How should David report this to their parent if they need to?
Will David need to file any other corporation related tax forms (not majority owner and not the incorporator)?
Will David need to file income taxes separately from their parent this year?
Sorry for the super obscure post. Thanks for your help.
First, who claims the student as a dependent?
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited institution and:
Is enrolled as a full time student for any one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:
the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)
The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story.
A few things I want to point out here.
1) The parents *QUALIFY* to claim the student. The parents are *NOT* required to claim the student as a dependent. But even if they don’t, since they *qualify* to claim the student, then if the student will be filing their own tax return the student is *REQUIRED* to select the option for “I can be claimed on someone else’s return”. To reiterate:
If the student qualifies to be claimed on the parent’s tax return, then the student can not take the self-exemption on their own tax return, no …matter…what.
2) There is NO requirement for the parents to provide the student any support. Not one single penny. The support requirement is on the student, and *ONLY* the student. To reiterate:
If the STUDENT did not provide MORE than 50% of THEIR OWN support, then the parents qualify to claim the student as a dependent on the parent's tax return.
3) The student's earned income *does* *not* *matter*. There is *no* earnings limit or threshold. The student could earn $100,000 during the tax year and still qualify to be claimed as a dependent on the parent's tax return.
EDIT: Bumped the mouse and posted before I was done.
As far as someone starting their own company or corporation, so long as they're 18 or older their dependency status is irrelevant. However, when filing the tax return there are two possible questions that make be asked. (wording not exact)
1) Does this tax filer *QUALIFY* to be claimed as a dependent? In David's case, he would answer yes.
2) Is this tax filer *ACTUALLY* claimed as a dependent on another tax return? This question could be answered yes or no, depending on if he was actually claimed as a dependent on someone else's tax return.
Thanks for the response! David does qualify to be a dependent and that was listed in the original post but I'll try and update that to be more clear. I'll also clarify that he would be claimed as a dependent by the parent as well. I checked the rules on claiming as a dependent prior to the original post to make sure but thanks for posting them here in case someone in the future has a similar question and can reference this one.
My dependency question was more relating to if David will have to file a return separately as I believe there is an income threshold where that becomes required (even if a dependent). So my comment on income was relating to that, not relating to his ability to be claimed.
Also, do you have any insight into the 83(b) election question or the other questions?
I appreciate your response but that's not the question I asked. I'll try and update the post to be clearer. I listed in the OP that he "is a dependent" because I know David qualifies (and would be claimed).
Will he need to file separately (and obviously still mark that he can be claimed as a dependent)?
Do you have any insight into the other questions?
Read the last paragraph of my previous post. It posted accidentally before I got that last paragraph in.
Basically, being a dependent has no bearing in any way, shape, form or fashion. On starting and owning a business. It's totally and completely irrelevant and just flat out does not matter at all.
Heck, a 16-year old can have their own grass cutting business as a dependent, and their dependency status just flat out does not matter. If he meets the filing requirements, he's required to file a tax return regardless.
For a corporation, be it an S-Corp or a C_Corp, the corporate return is still required unless specific and explicit conditions are met. One's dependency status is not one of those conditions.
A dependent has to file if his unearned income is over $1100 or earned income is over $12200, or his gross income IE: unearned and earned, is over $1100. There is also something called a "kiddy tax" if unearned income is over $2200 if that is the case suggest you see a tax pro
IN addition to unearned income over $1000 and earned income over $12,300 ( raised for 2020) if you have more than $400 of self-employment income that also requires you to file a tax return.