When your teenager receives their first pay check, they will notice that they have had some money taken out for federal income taxes - quite possibly state and local taxes too. American companies are required by law to take this money out of all employees pay. This will seem strange to your teenager and they will have questions about it and need to talk to you - especially since it has affected 'their' money. Here are the five most significant things you can explain to your teenager to help them understand income taxes:
Make your teen aware that if they work(earns income), they will have to pay taxes - minor or not. 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, the company will take taxes from their pay. If they make over a certain amount in a given year, they will have to file an income tax form and pay taxes on the appropriate amount. For the 2012 tax year, the rules are as follows:
- If your teen only has earned income, like from wages, they will have to file if they made $5,950 or more.
- If your teen only has unearned income, like interest on their savings account, they will have to file if they made $950 or more.
- If your teen has made a combined earned and unearned income, it gets a little trickier to figure out if they need to file. If their earned income is more than $5,950 or their unearned income is more than $950, they have to file. If your teen's gross income was more than the larger of $950 or their earned income, up to $5,650, plus $300. See examples of these tax rules on IRS Publication 929.
Your teenager should know that there may be times when they do not have to file an income tax form but, it may benefit them to do so anyway. For example, if they worked part time for a company, only earned a small amount, and federal income taxes were taken out of that small amount. They would be due a refund and can only get their refund if they file an income tax form.
Your teen needs to understand certain paperwork and tax forms. They will face many tax forms that will seem foreign to them. Here are just a few:
- When your teenager gets a job, they will be faced with filling out a W-4 form.
- When they get paid, there will be deductions taken off of their gross income. These are explained on their pay check stub.
- At the beginning of the next year, they will receive a W-2 form. Have them save that form. Perhaps you can keep it for them in a safe place as they may not understand the significance of it until it is lost.
- If your teenager has been doing self-employment work, such as mowing lawns, they will need to fill out a Schedule C form.
Your teen may need to file if they have unearned income.This is income from investments, interest, capital gains, etc.
Your teenager needs to know that the money they bring in babysitting and mowing lawns is considered earned income by the United States government. They will have to pay self-employment taxes on it if the amount is above what is set for that year. For instance, in the year 2011, if they bring in more than $400.00 of self-employment income. This is a low amount and you may want your teen to start paying attention to how many Friday and Saturday nights they are babysitting at $25 or more a night. If they babysit over the summer they will hit that amount and it will be reported by a credit on the taxes of the parents of the children your teen babysits. Keep track in a ledger and report it.
Your teen needs to know how tax money is used by the government. While taxes can seem like a burden, they are a necessary part of living in our great country. Income tax money does not just fly into an abyss and fade away. It takes money to run a country and your teen will, as a citizen of the Untied States, need to do their part. Federal income taxes go toward services, including repair of national highways, military spending, space exploration, law enforcement and aid to foreign countries - just to name a few. Knowing this will help your teenager feel a part of something that is bigger than themselves and help teach them about citizenship.
By sharing these five significant explanations about taxes with your teen, they will have a better understanding of what taxes are and how federal income taxes influence their world.