A teen’s tax filing requirements depend on his or her status as a dependent as well as on the amount and type of their income.
Even if a teen isn’t required to file his or her own tax return, it may be beneficial to do so.
A discussion about income taxes can be a great steppingstone to your teen’s broader financial education.
My daughter is 16 and has her first paying job. Does she need to file a separate tax return?
Congratulations to your daughter—and to you. A first job is an important milestone for both kids and parents. It's a step toward independence and personal responsibility for your daughter. And it's an opportunity for you to teach her some financial realities.
Taxes are definitely a part of that financial reality. So I'll first discuss the parameters for filing a tax return. Then I'd like to get into ways you can help your daughter learn to manage her money wisely—which, to me, is the most important lesson of all.
Basic guidelines for filing a teen's tax return
Whether or not your daughter needs to file a separate tax return depends on three basic factors:
- Is she considered a dependent by the IRS?
- How much income does she have?
- What type of income does she have?
The IRS considers a child to be a dependent if he or she:
- Is under 19, or under age 24 and a full-time student, or permanently disabled at any age;
- Lives with you more than 50% of the year; and
- Doesn’t provide more than half of his or her own financial support.
Next, you need to look at her income, both the amount and type. Here's where it gets more complicated because there are different rules and income limits for earned income from a job, unearned income from dividends, interest or investment gains—or a combination of both.
For earned income only
This is pretty straightforward. A dependent who doesn’t have unearned income only has to file a separate tax return if earned income is above—$6,350 for 2017. So if your daughter earned less than that, she wouldn't have to file.
But it could be a good idea to do it anyway. If her employer withheld federal income tax, she might be entitled to a refund. You don't want her to miss out on that. Plus, it's a good learning experience.
For unearned income only
Unearned income is a different story. If a child has unearned income above $1,050 for 2017, a tax return is required. But when dealing with unearned income only, you can choose to either file a separate return for your child or include that income on your own return. One caveat: If you include it on your return, it could boost you into a higher tax bracket—and possibly higher tax rates.
For a combination of both
The rules change again if a dependent has both earned and unearned income. In this case, you need to file a separate return if:
- Unearned income is more than $1,050.
- Earned income is more than $6,350.
- Combined income totals more than the larger of $1,050 or earned income (up to $6,000) plus $350.
To make this a little clearer, let's say your daughter had $100 in interest income plus $6,000 in earned income. She wouldn't have to file a return because both her unearned and earned incomes are below the thresholds and her total income of $6,100 is less than $6,350 (earned income plus $350). However, if she had $400 in interest income, she would have to file because her total income of $6,400 would be more than her earned income plus $350.
Now let's say your daughter had $400 in earned income and $800 in interest income. In this case, she would have to file a return because her total income of $1200 is more than $1050.
All this can be a bit confusing, so unless your daughter's situation is fairly straightforward, I'd talk to your tax professional. Also check out IRS Publication 501 for a thorough treatment and worksheet.
W2 versus 1099 income
You also should be aware of the different treatment of income reported on Forms W2 and 1099. If your daughter is considered an employee, her income will be reported on a W2 and subject to withholding. However, some employers prefer to hire part-time workers as contractors. On the plus side, nothing will be withheld. On the minus side, contractors who have net earnings (income minus expenses) of more than $400 will owe self-employment taxes, which basically cover Social Security and Medicare taxes. In this case, a contractor has to file a tax return even if no income taxes are owed. (IRS Publication 501 provides guidance).
A word on the “Kiddie Tax”
You may have heard of the Kiddie Tax, so I think that's also worth a mention. This has to do with tax rates on unearned income.
While for 2017, there's no tax on a child's unearned income that is less than $1,050, tax rates on unearned income above that amount vary. Unearned income between $1,050 and $2,100 is taxed at the child's rate. Unearned income above $2,100 is taxed at the parent's highest income tax rate. If your child has a lot of unearned income, that could be pretty significant.
Going beyond taxes
Whether or not your daughter files a return, I'd definitely talk to her about taxes and withholding, and have her work with you as you prepare either hers or your own return.
Then take it beyond taxes and talk about responsible money management. Now that your daughter is earning her own money, help her create a budget so she can make the most of it. For instance, what do you expect her to pay for? Clothes? Entertainment? Gas? Have her keep track of her expenses monthly (an online budget calculator can help).
Suggest that she save a certain percentage of her paycheck each month for some future goal. If she hasn't done so already, help her open both checking and savings accounts and set up an automatic deposit from one to the other. Now that she has earned income, you might even help her open a Roth IRA.
Establishing good money habits early is incredibly important but, in general, kids don't learn much about managing money in school. It's up to you. So show her how you manage for both the short- and long-term. If you take it step-by-step, and include her where appropriate in your own money strategies, you'll set her on the path to being able to not only handle her taxes, but her financial future, as well.
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