When Does Your Teen Have to Start Filing Taxes?
A first job is a rite of passage. "Whenever I hear a client say they have a child with income, my first thought is 'congratulations,'" says Jo Anna M. Fellon, principal at accounting firm Friedman LLP in East Hanover, New Jersey. After that, it's time to provide some guidance on how to spend that money and talk about taxes.
The letter of the law. The law is clear on what money is taxable and when a teen should start filing. Any teen who earned at least $6,300 in 2016 needs to file a tax return this spring. The only exception is for those who are blind, and they must file if their earned income exceeded $7,850. A tax return is also required in cases when a teen has unearned income, such as interest or dividends, greater than $1,050.
[Read: 8 Financial Gift Ideas for Children.]
Teens who are in business for themselves, be it mowing lawns or babysitting, should be paying a self-employment tax once they exceed $400 in income. However, teens who do these types of jobs are often paid in cash. "Most people don't report cash earnings," says Richard Rampell, principal in charge of the Palm Beach, Florida, office of accounting firm MBAF. However, that doesn't make it right. "The law says you must."
What people actually do. While the law is clear, not all families are aware of the income threshold for taxation or track their cash payments. Plus, clearing even $400 can be a major feat for some teens, particularly young ones. "Normally, babysitting money will not qualify," says Valrie Chambers, associate professor of accounting at Stetson University. "Occasional money earned outside the home is probably not subject to tax." However, when a teen goes from watching the neighbor's kids once every other month to providing daily after-school care, that's another story. At that point, a teen likely should be paying taxes on that income.
[Read: How to Qualify for Retirement Savings Tax Breaks.]
Claiming a teen's income on your return. Parents can file a teen's unearned income on their own return or use a separate form. The main benefit to attaching the income to a parent's return is convenience. But take a careful look at how adding a child's income to your return changes the tax rate on that income. "An item of caution for parents is that adding the unearned income could push them into a higher tax bracket," Fellon says. "These are the moments we say to consult with your tax advisor."
However, in some instances, a family may have no choice but to put the child's income on the parent's return. The so-called kiddie tax was instituted to prevent people from shifting investments to children as a way to ensure unearned income is taxed at a lower rate. For 2016, teens earning more than $2,100 in interest and dividends will see at least part of that money taxed at their parent's tax rate instead of their own.
[Read: 5 Money Lessons Teens Should Learn Before They Go to College.]
Free help for teen filers. Parents may be tempted to quickly complete tax forms on behalf of their teens, but experts urge adults not to deprive children of this learning experience. Fellon suggests letting the family tax preparer, if available, meet with a teen. That's not because a teen's tax return is complex, but rather because it creates an opportunity for an advisor to provide practical advice. Those words of wisdom may be better received from a professional than from a parent.
For families who do not have an existing relationship with a tax advisor, help for teens may be available through the Volunteer Income Tax Assistance program, known as VITA. Available to any household earning $54,000 or less, VITA provides free tax preparation through a network of nonprofits that have partnered with the IRS.
Tax preparation is a process in which teens should be actively involved. "This is not something a teen needs to figure out on their own," Chambers says. By understanding their tax obligations and the ins and outs of deductions and credits, they will be better prepared to make smart money moves as adults.
