Teens and Income Taxes
Getting a real job and a paycheck can be really exciting for teens. Not only will that spending money help them be able to have more fun, but it also can be instrumental in helping them become a more independent and responsible person.
When tax season rolls around, it can be confusing for teens and their parents to know how to file an income tax return for a minor.
Here are the five things you and your teen should know about income tax:
Minors Pay Taxes
Age is not a factor when determining whether or not a person has to pay income tax. If your teenager receives money from a company, income tax will be deducted.
Teens who earn a minimum amount will have to file annual income taxes. The minimum changes each year so it's important to stay on top of the latest tax laws.
Teens Need to Complete a W-4
After being hired for a job, employees are given forms to complete, such as the W-4. To a teen, these forms can be quite intimidating and difficult to understand.
Talk to your teen beforehand about the forms they will fill out. Make sure they know their social security number. You can find a W-4 form online and review it with your teen beforehand.
Make sure they understand each section. And make sure they know it's OK to ask their employer if they have any questions.
Explain that they should not sign legal paperwork without understanding it. And caution them against filling in forms with a guess if they don't know the answer.
Teens May Need to File Taxes for Unearned Income
If your teen has inherited money, stocks, or real estate, check with an accountant. Minors may have to report income if accounts are in their name. Minors who inherit such things from a grandparent or an aunt, for example, may suddenly have capital gains they need to pay tax on.
Unofficial Jobs Still Count as Income
If your teen mows lawns, babysits, or operates a small dog walking business, they still have to claim their income. They will be considered self-employed.
So it's important for your teen to keep track of the money they earn from those odd jobs. Each year, the threshold changes, so stay on top of the minimum amounts your teen can earn before they have to complete their taxes but it's usually only a few hundred dollars.
Tax Money Is Used by the Government
Most teens (and some adults) think taxes are an unfair burden. You can address your teen's concerns by explaining how tax money is issued.
Federal income tax helps pay for services like law enforcement and repair of the national highways. And state tax may help pay for schools and jails and may assist people with disabilities.
No matter what type of income your teen has, or whether they have to file income taxes, it's important to explain how taxes work. Then, your teen will have a better understanding of taxes and the economy when they become more gainfully employed as an adult.
It's never too early to start teaching your teen about money. When they have a better understanding of how money is earned and how taxes are paid, they'll be better equipped to handle their own budget.