Does Your Teen Have to Pay Taxes? Everything You Need to Know

If your teen has started earning money, you might be wondering if they need to pay taxes. Understanding tax rules for teenagers can seem confusing, but it’s important to know when and how they are required to file taxes. This guide will help you understand the basic guidelines, including income thresholds, jobs that require tax payments, and what filing involves. Learning these rules can help your teen stay on top of their financial responsibilities.

Does Your Teen Need to File Taxes?

Internal Revenue Service (IRS) has specific rules for deciding who will submit tax returns including teens. Does your teenager need to register tax, it depends on the type of income and the amount. Below we emphasize important factors in understanding these requirements, which generally look at the clarification for annual changes in the threshold.

1. Earned Income

Earned income refers to money your teen receives from work, such as wages from a part-time job, or summer employment. Filing requirements for earned income vary based on whether your teen is claimed as a dependent on your tax return.

General Guidelines:

1. If your teen is not claimed as a dependent: They must file a tax return if their earned income exceeds the standard deduction for a single filer. This deduction amount changes annually, so be sure to check the current year’s figure.
2. If your teen is claimed as a dependent: Filing is required if:

• Their earned income exceeds the standard deduction for a single filer, or
• Their earned income is below the standard deduction but surpasses a minimum threshold, and they owe taxes (e.g., if taxes weren’t withheld from their paycheck).

2. Unearned Income

Unearned income includes money from investments, interest, dividends, or gifts. The filing threshold for unearned income is usually lower than for earned income.

General Guidelines:

• If your teen is claimed as a dependent: They must file a tax return if their unearned income exceeds a specific IRS-set threshold, which is typically lower than the standard deduction for earned income.

3. Combined Income

When your teen has both earned and unearned income, the filing requirements become more nuanced. In this case, they must file a tax return if their gross income exceeds the larger of:

• A minimum threshold set for unearned income
• Their earned income (up to the standard deduction) plus a small additional amount.

Taxes on Part-Time Jobs and Summer Work:

Many teens take on part-time jobs or summer gigs to earn extra cash. If your teen has a job, their employer will likely deduct federal and state taxes from their paycheck. Here’s what you need to know:

W-2 Forms:

At the end of the year, your teen’s employer will issue a W-2 form detailing their total earnings and taxes withheld. This document is crucial for filing their tax return.

Self-Employment Taxes:

If your teen works for themselves—such as babysitting, tutoring, or selling handmade products—they may be responsible for self-employment taxes. The IRS requires anyone earning $400 or more in net income from self-employment to file a tax return.

Tax Refunds:

Even if your teen doesn’t earn enough to meet the filing threshold, they might still want to file a tax return to claim a refund for any taxes withheld from their paycheck.

Can You Claim Your Teen as a Dependent?

Claiming your teenager as a dependent on your tax return can offer valuable tax benefits, but certain conditions must be met. Here's what you need to know:

• Age Requirement: Your teen must be under 19 years old, or under 24 if they’re a full-time student.
• Residency: They must live with you for more than half the year.
• Financial Support: They cannot provide more than half of their own financial support.

If you claim your teen as a dependent, they won’t be able to claim their own personal exemption on their tax return. However, they can still file a return to report their income and take advantage of eligible deductions or credits.

Tax Benefits for Teens:

Even if your teen needs to file a tax return, they could qualify for several valuable tax benefits:

Standard Deduction

For 2023, the standard deduction for single filers is $13,850. If your teen’s total income is below this amount, they won’t owe any federal income tax.

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit is a refundable credit designed to assist low- to moderate-income workers. If your teen meets the eligibility criteria, they could receive a credit that either reduces their tax bill or results in a refund.

Education Credits

If your teen is covering tuition or other higher education costs, they may qualify for education-related tax credits such as the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). These credits can help offset expenses like tuition, fees, and other qualified educational costs.

Teaching Your Teen About Taxes

Filing taxes for the first time is an excellent opportunity to teach your teen essential financial skills. Here’s how you can guide them through the process:

Start with the Basics

Introduce your teen to key tax concepts, such as the difference between earned and unearned income, the importance of accurate record-keeping, and how tax brackets determine what they owe.

Make It a Hands-On Experience

If your teen needs to file a tax return, involve them step by step. Walk them through gathering necessary documents, completing tax forms, and using tax software to file. Hands-on participation will help them feel confident about managing taxes in the future.

Broaden the Conversation

Use this moment to discuss larger financial themes like saving, budgeting, and planning for major expenses, such as college or purchasing a car. These lessons will help instill a sense of responsibility and prepare them for financial independence.

Common Mistakes to Avoid with Teens and Taxes

Navigating taxes as a teenager can be tricky, and there are several common mistakes to watch out for:

1. Failing to File When Necessary: Many teens assume they don’t need to file a tax return because their income is low. However, filing is crucial if they owe taxes or qualify for a refund. Missing this step could mean leaving money on the table.
2. Incorrectly Claiming Dependents: If your teen is filing their own tax return, they must avoid claiming themselves as a dependent if you’ve already done so on your return. Double-check to ensure there’s no overlap.
3. Missing Deductions and Credits: Teens often overlook valuable tax deductions and credits simply because they’re unaware of them. Be sure to research all available tax benefits to maximize their return.

Conclusion:

Navigating taxes for your teen doesn’t have to be overwhelming. By understanding the filing requirements, exploring potential tax benefits, and teaching your teen about financial responsibility, you can set them up for success. Whether they’re earning money from a part-time job, freelancing, or investing, it’s important to stay informed and proactive about their tax obligations.