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YOUR MONEY | Q&A | MONEY TALK

If Daughter Wants Refund, She Has to File a Return

June 29, 1997|CARLA LAZZARESCHI

Q My daughter works at a fast-food restaurant and made $4,000 last year, from which state, federal disability and Social Security taxes were withheld. Because her earnings were so low, she wasn't required to file a tax return. But what happens to all those taxes she paid? How can she get them back?

Also, is there some way I can hire my children to work in the business I own? I'd love to be able to pay them a wage that I could claim as a business expense.

--D.G.

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A The only way your daughter can recover the taxes that have been withheld from her pay is to file a tax return. However, she can reclaim only the state and federal income taxes that were prepaid. State disability insurance and Social Security payments will not be refunded unless they exceed the maximum annual limits.

You may hire your children to work in your business. The wages you pay them are considered taxable income to them, and you may deduct the wages as a normal business expense, just as you would any other employee's wages.

One advantage for both you and your children is a special Social Security provision that allows children under age 18 to work for their parents who are sole proprietors without either party making the otherwise-mandatory contributions into the retirement program.

Finally, some unsolicited advice: You may want to consider raising the hourly wage you pay your children with the understanding that they put away $2,000 each year into an individual retirement account. (This assumes, of course, that your cash flow permits such largess.)

Your kids' IRA contributions will be tax-deductible to them and, through the magic of compounded, tax-deferred interest earnings, should provide a tidy bit of retirement income when that time comes. For example, a 16-year-old's contribution of a mere $2,000 that is allowed to sit untouched, with no additional contributions, becomes about $101,000 in 51 years through compounded interest at the rate of 8% per year. Assuming a 10% annual reinvested return, the nest egg becomes more than $258,000 when your child is ready to retire at age 67.

Of course, those accounts won't have today's purchasing power--and who knows what the tax laws will be like in 2048?--but it's hard to ignore the benefits of such compounding with such a relatively small initial stake.

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Q Is rent that a film company pays for two days' use of my house subject to income tax?

--B.S.W.

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A The Internal Revenue Service allows homeowners to rent their residences, both primary and secondary, up to 15 days each year without declaring the payment as income.

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Q Going through my late father's papers, I discovered that he owned 100 shares of an obscure railway that I believe has long since gone out of business. I know you have written about how we can research for ourselves whether such stock is as worthless as it would seem. Also, isn't there a company that will do the research for you for a fee? Can you repeat this information?

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A Prudential American Securities charges $40 per company to search for what has become of the firm in whose name you hold stock. Simply send a copy of the stock certificate along with a check for the correct amount to Prudential American Securities, 921 E. Green St., Pasadena, CA 91106.

If you want to do the work yourself, here's a path to follow: First, check the Stock Guide published by Standard & Poor's; although your company may not be listed in your local newspaper stock listings, it may be quoted on one of the nation's stock exchanges.

You should also check the "pink sheets" published by the National Quotation Bureau in Cedar Grove, N.J. Finally, you should review the "obsolete securities" section of the Financial Stock Guide Service published by Financial Information Inc.

All three of these publications are usually found at most full-service brokerages, although you should be warned that these offices may not make them available to anyone but their regular customers.

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Q My accountant says I must notify the government now that my Keogh account has accumulated more than $100,000. Is this right?

--N.W.

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A Yes, the filing of a Form 5500 is required. Companies are supposed to file these pension or profit-sharing plan reports every year. However, if your plan covers only you or you and your spouse, you are relieved of that filing burden until the account contains $100,000.

Once the account exceeds that amount, you are required to file a Form 5500-EZ for that tax year and all subsequent ones, even if the plan's assets dip below the $100,000 level.

The Form 5500-EZ due date for a 1996 calendar-year plan is July 31, unless an extension is obtained from the IRS.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi@latimes.com

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