The topic of taxes often conjures images of endless forms and confusing regulations. For teenagers stepping into the working world, however, gaining a basic understanding of taxes is a pivotal step toward adulthood. Navigating taxes with your teen not only helps them comply with current laws but also instills a sense of financial literacy and responsibility. It’s about laying the groundwork for their future financial health, ensuring they understand the importance of managing their earnings, and preparing them for the adult world. Here’s what you need to know about teens and taxes.
When Does a Teen Need to File Taxes?
You might be asking yourself, “At what point does my child need to file taxes?” The IRS has clear guidelines on who needs to file a tax return based on income levels, the source of income, and filing status. For teens, the need to file can be triggered by earning more than the standard deduction amount for a single filer, which changes annually. For the 2024 tax year, for example, the amount is $14,600 for individuals. If your teen’s income exceeds this threshold, they must file a tax return.
However, it’s not just about the amount earned. If your teen has income from self-employment, including freelance work, they may need to file a tax return if they earn $400 or more. This lower threshold is because self-employed individuals are required to pay Social Security and Medicare taxes, which aren’t typically withheld by employers for independent contractors.
Another consideration is whether your teen has unearned income. The rules here differ slightly, with lower thresholds triggering the need to file. Understanding these nuances is crucial to ensuring your teen complies with tax laws and takes advantage of any opportunities to reduce their taxable income through deductions and credits. Now, let’s take a look at some instances where your child may owe taxes.
Money Earned from Babysitting
Among the many ways teens earn money, babysitting is still a popular choice. So, you might be wondering, “Is money earned from babysitting taxable?” The short answer is yes, it can be. When a teen takes on babysitting, they’re essentially self-employed. This means the income earned from these endeavors is subject to tax if it exceeds $400 in a year.
For teens embarking on babysitting as a serious source of income, understanding the need to track their earnings and potentially pay taxes on them is a crucial lesson in financial responsibility. Encourage your teen to maintain a ledger or use a simple accounting app to help them manage their babysitting earnings and prepare for any tax obligations they may encounter. This proactive approach not only aids in tax compliance but also instills valuable financial management skills.
Are Scholarships Taxable for Teens?
Scholarships are an important financial resource for many teens embarking on their college journey. The tax implications of scholarships, however, are not always straightforward. Generally, a scholarship used for tuition, fees, books, and supplies required for coursework, is not considered taxable income. This exemption allows students to utilize these funds for their intended purpose without worrying about a tax burden. Unfortunately, scholarship money used for other expenses, such as room and board or travel, must be claimed as unearned income and is taxable. It’s important to note that scholarship proceeds are only taxable for the year they are disbursed. For example, if your child earns a scholarship as a junior in high school, they won’t need to claim it (if taxable) until the funds are disbursed at college.
Additionally, who will claim the scholarship money on their tax return (you or your child) will depend on several factors. It’s a good idea to consult with a tax professional if your child wins a significant amount or secures a full-ride scholarship to ensure you’re reporting the income correctly.
Does My Teen Need to Pay Taxes on Prizes?
Imagine your teen wins a substantial prize in a competition or contest. Does this windfall count as taxable income? Surprisingly, the answer is yes. Prizes and awards are considered other income by the IRS and must be reported on tax returns. This includes cash prizes, as well as the fair market value of any non-cash prizes, such as electronics, trips, or cars. If the total exceeds $2,600 (2024), it may also be subject to the kiddie tax.
Part-Time Jobs & Taxes
Many teens take on part-time jobs to earn money for the summer or save for college. Depending on the type of position they hold, they will either have taxes deducted through their employer or need to pay estimated taxes (self-employed). If they earn more than $400 from self-employment, they’ll need to file a tax return. For W-2 employment, they will only need to file if their total income earned exceeds the single-filer standard deduction or if they want to claim a refund on the taxes they paid throughout the year.
Deductions & Credits For Teen Taxpayers
When it comes to taxes, it’s not just about what you owe; it’s also about understanding what deductions and credits are available to reduce your tax liability. For teen taxpayers, several deductions and credits can apply, depending on their situation. For instance, if they’re self-employed, they may be able to deduct business-related expenses, reducing their taxable income.
Additionally, teens attending college may benefit from education-related credits, such as the American Opportunity Tax Credit or the Lifetime Learning Credit. These credits can offer significant savings, reducing the amount of tax owed or even increasing their refund.
Navigating deductions and credits can be complex, but it’s worth the effort to understand what’s available. This knowledge can significantly impact a teen’s tax situation, offering opportunities to maximize their return and minimize their tax liability.
Helping Your Teen File Taxes: Tips and Resources
As your teen prepares to file their taxes, it’s important to provide guidance and support. Start by helping them gather the necessary documents, such as W-2 forms from employers or 1099 forms for self-employed individuals. Reviewing these documents together can be an educational experience, providing insight into how earnings and taxes work.
There are also numerous resources available to assist with the filing process. The IRS offers free filing options for those who qualify, and many tax software companies provide free or discounted services for simple returns. Additionally, seeking out a tax professional or utilizing a local tax assistance program can be beneficial, especially for more complex situations.
Empowering your teen to take charge of their tax filing not only complies with tax laws but also builds essential financial literacy skills. It’s an opportunity for them to learn about the importance of accuracy, record-keeping, and planning in financial matters.