Many parents of teenagers can wonder how (or whether) their teen's first job will affect their income taxes. Are they on the hook for taxes owed if the teen is claimed as a dependent? What happens if the teenager doesn't file a tax return? Read on for answers to some common questions parents may have about teen wage taxation.
In most cases, a teenager’s summer earnings will fall well below the tax liability threshold, which means they shouldn’t owe the IRS or their state any additional taxes. But some teens may be due to a federal or state tax refund because of over-withholding; this means it’s usually a good idea for your teen to go ahead and get into the habit of filing an income tax return.
If a teen is a taxpayer's dependent and has an earned income of less than the standard deduction ($12, 000 for the tax year 2018), they won’t be penalized for failing to file a tax return. On the other hand, federal income tax returns are expected of teens with earned income of more than $12, 000 or unearned income of more than $1, 050. (Because unearned income over $1, 050 is taxed at the
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Another way teenagers can benefit from their relatively low tax rate is by contributing to a Roth IRA. For the 2019 tax year, wage-earners can contribute up to the $6, 000 limit or the equivalent of their total annual W-2 or 1099 earnings in 2019, whichever amount is lower.
By contributing this money post-tax now, teens can set themselves up for tax-free withdrawals at retirement or tax- and penalty-free withdrawals of their initial contribution once the account has been open for five years or longer. Giving this money 40 years or more to grow can make a major difference in one's retirement finances, even if the amount invested is quite modest.More teenagers are working this summer. There aren't any jobs out there for young workers. Employers are struggling to find teens to work at traditional summer jobs.
So just what is the youth employment situation for the summer of 2015? Great, good or terrible depending on where you and your teenage live and the type of work you and your youngster are seeking.
Do Teens Have To File Taxes?
The ebb and flow of youth jobs: The Pew Research Center recently looked at what's happened over the years to the Great American Summer Job.
Drew DeSilver, writing for the nonprofit's FacTank feature, notes that data available since 1948 show that, not surprisingly, teen summer employment has over the decades risen during good economic times and fell during and after recessions.
Generally, the temporary youth employment rate ranged between 46 percent, which was the low in 1963, and 58 percent, which was the peak in 1978.
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But after the 1990-1991 recession, the teen summer employment rate barely rebounded. Teen summer employment again fell sharply after the 2001 recession and again failed to rebound, writes DeSilver. Jobs for young workers fell even more sharply during and after the Great Recession of 2007 to 2009.
So while there are jobs out there, they aren't as plentiful as when today's young workers' parents and grandparents were taking this annual trip down the road to adulthood.
Taxes once you do get hired: Finding a job is just one issue that young workers must deal with this summer. After they finally land a position, then they usually face taxes.
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Yep, Uncle Sam doesn't care how old or young you are. If you make money, he typically wants his piece of it.
If you don't earn much at a job, you might not have to pay income taxes. Generally, a worker who is the dependent of another person -- for purposes of this post, we're talking about a minor child living with mom and/or dad -- doesn't have to file an income tax return unless the young employee makes more than the single filer's standard deduction amount.
I don't know about you, but if I was making less than $6, 300 for giving up my summer fun, I'd quit. But that's just me.
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Tips are taxable: As the Pew graphic on which type of summer jobs young workers tend to get shows, food service work is at top. That could mean the young worker gets tips.
Young wait staff take note. Tips are not free money. They are taxable income. And if you earn $20 or more in cash tips in any one month, you must report your tips for that month to your employer.
Self-employment taxes: Ent repreneurial youngsters also face some added tax tasks. If you net $400 or more from your dog walking or delivery services or computer tutoring summer business, they you'll have to file Schedule SE to pay self-employment taxes.
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SE taxes are counted toward your future Social Security and Medicare coverage. These taxes are due even if you don't hit the $6, 300 earnings threshold requiring you file a Form 1040 .
Filing when it's not required: A young worker might not legally be required to file a tax return, but it still could be a good idea.
This typically is the case when withholding was taken out of the young employee's paycheck. Filing a tax return is the only way a young worker can get that tax money.
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While that's still a pain, at least most young workers can file Form 1040-EZ , which, as its name indicates, is the simplest tax return.
You can find out more about taxes and young workers in the latest Weekly Tax Tip on teen jobs and tax issues.
Posted on Friday, July 10, 2015 at 11:52 AM in Family, Filing, IRS, Tax Tip, Taxes, Work-job-career | Permalink | Comments (1)Is your kid earning money from a summer job or some other activity? If so, what are the tax implications? And BTW, what kid-related tax breaks can you collect? Good questions. Here are some answers.
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Maybe. For 2019, a dependent child must file a federal income tax return on Form 1040 in any of the following situations:
* The child has unearned income of more than $1, 100. If your child has more than $2, 200 of unearned income, he or she may be subject to the dreaded Kiddie Tax. More on that later.
* The kid owes other taxes such as the self-employment tax or the alternative minimum tax (AMT). Relatively unlikely, but it happens.
What To Know About Summer Jobs And Teen Taxes
The good news is your child can shelter his or her income with the standard deduction. For 2019, the standard deduction for a dependent kid with only investment income is $1, 100. If your child has earned income from summer jobs or whatever, the standard deduction equals the lesser of: (1) earned income plus $350 or (2) $12, 200. So up to $12, 200 of earned income can be sheltered with the standard deduction. Good.
Key Point: Even if no return is required for your child, one should be filed if federal income tax was withheld for any reason and would be refunded if a return is filed. Filing a return is also necessary to benefit from certain beneficial tax elections, such as the election to currently report accrued Savings Bond income that would be sheltered by your kid’s standard deduction.
According to IRS Publication 929 (Tax Rules for Children and Dependents), a child is generally responsible for filing his or her own federal income tax return on Form 1040 and for paying any tax, penalties, or interest. If a child cannot file for any reason, the child’s parent, guardian, or other legally responsible person must file for the child. If the child can’t sign the return, a parent or guardian must sign the child’s name followed by the words “By (signature), parent (or guardian) for minor child.” Your child may also need to file a state income tax return. If so, that probably winds up on your plate too.
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Key Point: If you sign a return on your child’s behalf, you can deal with the IRS on all matters related to the return. In general, a parent or guardian who doesn’t sign can only provide information concerning the return and pay the child’s tax bill.
Probably. If your child will be under age 19 (or under age 24 if a full-time student) as of 12/31/19 and his or her only income is from interest and dividends, including mutual fund capital gain distributions, you can generally choose to report the kid’s income on your return by including Form 8814 (Parents’ Election To Report Child’s Interest and Dividends) with your Form 1040. Read the Form 8814 instructions to see if you qualify for this option. If you do, it may or may not result in a lower tax bill for the kid’s income.
Good thing you asked. For 2018-2025, the Tax Cuts and Jobs Act (TCJA) revamped the Kiddie Tax rules to tax a portion of an affected child’s or young adult’s unearned income at the higher rates paid by trusts and estates. Those rates can be as high as 37% or as high as 20% for long-term capital gains and dividends. Before the TCJA, the Kiddie Tax rate equalled the parent’s marginal rate--which for 2017 could have been as high as 39.6% or 20% for long-term
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