You know you have to file a tax return, but does your teen? The deadline is rapidly approaching, and he or she may — or may not — have received forms relating to income last year.
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Chances are, your teen does not have to file. John Scherer, a certified financial planner with Trinity Financial Planning in Middleton, Wis., said they do not have to file if they have investment income of less than $1,000 or earnings of less than $6,200.
If your teen is under those thresholds and worked a job that withheld taxes, though, he or she would want to file to get those withholdings refunded. So encourage your teen to collect those W-2s, even if it seems like a lot of trouble for a refund that doesn’t sound terribly impressive (and yes, he or she might have multiple W-2s, if there were paychecks from a summer job, a part-time job and a holiday job). If your child is not required to file, the April 15 date does not apply, but it’s still a good idea to dig out those forms, if for no other reason than to emphasize they are important papers and should not be disregarded.
And even if W-2s weren’t issued (as for babysitting), it’s smart to keep — or to begin to keep — a record of earned income, Scherer said. This can be as simple as keeping a log and making corresponding deposits to a bank account. Those earnings won’t owe income tax so long as they add up to less than the standard deduction ($6,200 for 2014). (Update: Keep in mind, if your teen earns $400 or more and they are not employed by someone else, this income is considered self-employment income and they must file a tax return and pay self-employment taxes, warns Burton M. Koss, an enrolled agent with Cortes & Baker LLC.)
Where the record of earnings can come in handy is with establishing a Roth IRA. While we don’t expect most teens to want to save all they earned for retirement, the limit is 100% of earnings or $5,500, whichever is smaller. So a parent or grandparent could put money into a Roth on the teen’s behalf, as long as the teen has earned income. And the young person’s retirement savings will not be counted against possible financial aid for college, but will have more years to increase in value.
So it’s smart to file, even if it’s optional and little or no refund is coming. Your teen might get a little tax money back, assuming it was withheld, and he or she should also get a glimpse of what taxes are and how they work — and some early practice at keeping records for tax purposes. Parents would be wise to “walk through it with the kids,” Scherer said. “For most folks, taxes are one of their biggest expenses they have.” And learning early that planning ahead can save real money can only help teens later.
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Gerri Detweiler is Credit.com's Director of Consumer Education. She focuses on helping people understand their credit and debt, and writes about those issues, as well as financial legislation, budgeting, debt recovery and savings strategies. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.com. More by Gerri Detweiler