Earning money as a teen can be a great first step toward financial independence, but there’s one important thing you can’t afford to overlook: taxes. Just like adults, teens have to pay federal and state income taxes once their income hits a certain threshold.
If you’re a teen working a part-time job, summer job, or side hustle, it’s important to know when you’re subject to tax and how you’re expected to pay it.
Key Takeaways
– Teens may be required to pay income tax on the money they make once their earnings reach certain limits.
– In addition to the amount a teen makes, the type of income they earn can impact their tax liability and how much they might be expected to pay.
– Teens don’t need to file a separate tax return from their parents unless certain conditions apply.
– Different tax rules apply for teens who have earned vs.
Do Minors Have to File Taxes?
There isn’t a definite answer as to whether minors have to file a tax return. That’s because it depends on a teen’s situation. Being a minor doesn’t exempt a teen from paying taxes, but it doesn’t necessarily mean they’re required to file a separate tax return from their parents.
As a general rule, most U.S. citizens and permanent residents need to file a tax return if they make more than a certain amount for the year.
The two main factors that determine whether a minor has to pay taxes or file a separate tax return are their dependency status and their income.
Dependency Status
Minors who qualify as dependents on their parent’s tax return don’t have to file a separate return until their income exceeds certain limits.
To be a dependent, a minor must generally:
– Be under the age of 19 (or 24 if attending school on a full-time basis)
– Not provide more than half of their financial support
Dependents can include children or other qualifying relatives. For instance, a teen who moves out of their parent’s home and lives with a grandparent or an aunt could be claimed as a dependent by one of these other relatives if they meet the rules above. Additionally, a dependent must be unmarried and a U.
S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico.Assuming a minor meets the dependent test, the next step in determining whether they need to file a tax return is their income. As mentioned, specific income limits decide when a teen has to file their return.
Parents can claim children over 24 as dependents if they’re totally and permanently disabled.
Income Thresholds
There are two types of income that the Internal Revenue Service (IRS) uses to determine when a teen has to file a tax return: earned and unearned income.Earned income is money made from working and includes salary, wages, tips, professional fees, and any other amounts received for work performed. So, if a teen is making money by working part-time at a local fast food restaurant or cutting grass on the weekends in the summer, that’s earned income.
Unearned income is income from investments and includes interest, dividends and capital gains, rents, royalties, etc.
The IRS classifies distributions of interest, dividends, capital gains, and other unearned income from a trust to beneficiaries as unearned income.
For the 2023 tax year, the income thresholds are set as follows: $13,850 for dependents with earned income and $1,250 for those with unearned income. When a teenager has both earned and unearned income, they must combine these to determine if they meet the tax filing requirement. For 2023, teens with both types of income must file if their combined gross income exceeds $1,250 or if it surpasses their earned income (up to $13,450) plus $400. For example, a teenager with $1,300 in unearned income and $14,000 in earned income would need to file a separate return. Conversely, a teenager with $200 in investment income and $600 in earned income would not need to file, as their total income of $800 is below the $1,250 limit. Self-employed teenagers are required to file if their income from self-employment is $400 or more for the year. Teens with part-time jobs may not need to file a tax return based on their income. If their earned income does not exceed $13,850 and their parents claim them as dependents, they are exempt from filing. However, it’s advisable for teens to file if taxes were withheld from their paychecks, as they could receive a tax refund. This refund can be used to establish a custodial IRA for retirement with parental assistance. The IRS differentiates between taxable and nontaxable income. Unless specified otherwise by law, any amount of money included in income is generally taxable. Common types of nontaxable income include inheritances, gifts, bequests, cash rebates, alimony payments post-2018 divorces, child support, most healthcare benefits, adoption reimbursements, welfare payments, life insurance death benefits, and scholarships. Even with taxable income, a teenager does not necessarily need to file a tax return if their income does not exceed the annual limit. Capital gains arise when an investment is sold at a higher price than it was purchased. If a teenager has investments that generate capital gains, such as stocks or mutual funds, they may be subject to the kiddie tax. Parents or teens can use IRS Form 8615 to calculate the kiddie tax, which is required only if a child’s income is solely from interest and dividends (including capital gains distributions) and exceeds $2,500 for the year.Understanding the kiddie tax is crucial for parents and teens. The kiddie tax applies to children under 18 at the end of the tax year, or those who are 18 and didn’t have earned income providing more than half of their financial support. It also applies to full-time students aged 19 to 24 under the same financial condition, with at least one parent alive at the end of the tax year. If the child is required to file a tax return and isn’t filing jointly, and their only income is from capital gains, interest, or dividends totaling less than $12,500 for the year, parents can elect to report that income on their tax return instead of filing a separate one for their child.
Parents and teens may benefit from consulting a tax or financial advisor to handle the kiddie tax effectively if it applies. Filing taxes as a teen is similar to filing as an adult, but having a checklist can simplify the process. Here are the steps: Step 1: Determine if You Need to File Knowing the type and amount of income you have can help determine if you need to file a tax return. If you worked a job requiring a Form W-4, you should receive a W-2 form from your employer in January, detailing your income for the year. If self-employed, calculate your income, or if an independent contractor, expect a Form 1099 showing your income. Investment income is reported on Form 1099, with different forms for different types, such as Form 1099-DIV for dividends and Form 1099-INT for interest income. Step 2: Organize Your Information If you need to file a tax return, gather all necessary information, including your Social Security number (SSN), W-2s from employment, 1099s from self-employment and investment income. Side hustlers or business owners should also organize receipts for deductible expenses. Step 3: Select a Tax-Filing Software While you can fill out paper tax forms, using tax software is more efficient and less confusing. The IRS provides a list of free tax software programs for federal tax returns. Note that filing state tax returns with the same program may incur a separate fee.For the 2023 tax year, eligible taxpayers can file their federal tax returns for free directly with the IRS through the Direct File program. This pilot is only available to people who lived in the following states in 2023:
Arizona California Florida Massachusetts Nevada New Hampshire New York South Dakota Tennessee Texas Washington state Wyoming You can verify whether you are eligible to use Direct File by referring to the IRS website. Step 4: Complete Your Return Once you choose a tax-filing software, you can get to work filing your return. That could take a few minutes to a few hours, depending on how complicated your filing ends up being. Here’s what you can expect to do to file your return: Start with the basics. Enter your personal information, including your name, date of birth, and SSN. Choose a filing status. Your filing status tells the IRS which tax rates to apply to your income. Unless you’re married, you’ll choose single here. Report your income. At this step, use your W-2s to enter information about your employer, income, and the amount of tax you paid for the year. This information is included in different numbered boxes on your W-2, but your tax software program should tell you where to find it. The program should also prompt you to enter other income, including money you made from self-employment or investment income. Choose your deduction. The options are standard or itemized. A deduction allows you to subtract a certain amount of money from your taxable income. The IRS gives you a choice of standard or itemized deductions. Most teens will choose the standard deduction unless they run a business and have a lot of expenses that they want to write off. Check for tax credits. Tax credits reduce what you owe in taxes dollar for dollar. Tax-filing software programs usually have built-in checks that will review your return for you and look for any credits that you might be eligible to claim. Sign and submit. If you’ve entered all of your information, you’ll have a chance to review your return and make sure everything is correct. At this point, you should be able to see whether you owe taxes or are getting a refund. If you’re getting a tax refund, you’ll need to tell the IRS where to send it by entering your bank account information. (Direct deposit is the fastest way to get your tax refund if you’re owed one.) Once you’ve done that, you can electronically sign and submit the return. After you file your federal return, you might be asked if you want to file your state return as well. If you decide to do that, the program can transfer your information over and complete your state return in a matter of minutes. You can then review it, see what you owe or stand to get back, sign it electronically, and submit it. What if you owe taxes? You should still file your return, but you’ll need to arrange to pay what you owe by the tax filing deadline. If you don’t pay on time, the IRS can charge penalties and interest, which can add to the total you owe. Do Minors Get Taxes Taken Out of Their Paychecks? If you’re working a job as a teen and your employer requires you to complete a Form W-4 at hiring, then they should be taking taxes out of your paycheck.Do You Have to Pay Taxes When You Turn 18?
You have to pay taxes when you have taxable income, regardless of age. Turning 18 doesn’t automatically mean you’ll have to start filing a tax return or that you’ll have to file your income on your parents’ return. However, the Internal Revenue Service (IRS) generally requires you to file a tax return once your income exceeds a certain limit for the year. You may not owe taxes, but you could miss out on collecting a refund if you don’t file.
How Much Does a Teenager Get Back in a Refund on Their Taxes?
Whether you can get a tax refund as a teenager depends on whether you file a tax return with your parents or separately, how much income you have to report, and which tax deductions or credits you might qualify for. Running the numbers through an online tax refund calculator can help you estimate how much you might be able to get back at tax time if you know your income and filing status.
Do High School Students Have to File a Tax Return?
High school students may have to file a tax return separately from their parents if their income exceeds certain limits for the year. Whether a teen needs to file their own return will depend on the type of income they have (earned or unearned) and how much money they make for the year. Generally, it’s more common for teens who work or have a side hustle to file their income with their parents’ return.
That includes both federal taxes and state taxes. Somewhere on your pay stub, you should see the various taxes that are being deducted and the amounts listed.
The Bottom Line
Filing taxes as a teen doesn’t have to be confusing if you understand when you’re required to file. Talking to your parents about taxes and when you’ll have to start paying can make the process easier to navigate. You can also discuss the best ways to use your tax refund if you expect to get money back.
