Why Teens Should File a Tax Return

Like many teenagers, Jeff Burke’s daughter has a summer job. She is not legally required to file a federal tax return because her income is too low. But her father, a financial planner in Eden Prairie, Minnesota, makes sure she files a return anyway. The potential benefits, he says, are too good to miss.

In 2020, about 17.6% of Americans between the ages of 16 and 19 were gainfully employed while also enrolled in school. They earned a median income of just under $250 per week. Many of these young people were enrolled only on a seasonal basis, working in the summer or on holidays. They are often in the same situation as Burke’s daughter: they are not legally required to file a return, but they should still consider doing so. Experts say the benefits are worth more than the minimal hassle.

When do teenagers have to file a return?

Americans are legally required to file federal income tax returns when they earn at least $12,550 — the standard deduction for the 2021 tax year. Earn less than that, as many teenagers do, and you won’t. do not have to file a federal income tax return.

The exception, says Yves-Marc Courtines, a financial planner in Manhattan Beach, Calif., is the so-called child tax. A dependent child with more than $1,100 in unearned income (usually from interest or investments) must file a return. Any unearned income over $2,200 is taxed at the parent rate.

This means that the teenager who earned a salary working as an ice cream scoop or summer camp counselor and earned less than $12,550 in 2021 is not legally required to file a federal tax return. A child who has done well in cryptocurrency or stock trading, on the other hand, may need to deposit.

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File anyway, even if it’s not necessary

It’s still worth taking a few minutes to file a federal tax return, even if the law doesn’t require it. First, a teenager who earned less than $12,550 last year probably owes no federal or state taxes. Filing means getting a refund of any taxes your employer withheld from your paychecks. It also reduces the risk of a misunderstanding in which the IRS wonders why you had a job but didn’t file a tax return.

A tax return also creates a paper trail for a Roth IRA, although technically you can contribute to a Roth without a deposit. If you are at least 18 years old, you can start a Roth in your own name; parents or guardians can create Roth beneficiary accounts for young teens.

It’s a big reason Burke’s daughter is filing a statement, he says. “Even if her income is low enough that she doesn’t have to pay taxes, she can still contribute to an investment account,” he says. “Since her current tax rate is zero, we’re having her contribute to a Roth account, where she’ll enjoy tax-free growth. Essentially, it’s money that will never be taxed. .

This money has plenty of time to grow. Start contributing $100 a month to a Roth when you’re 15, and you’ll have $382,697 by age 65, if you keep your contributions at that modest level, assuming an average annual return of 6%.

A return can help families pay for college

By putting money into a Roth, families get another benefit. The Free Application for Federal Student Aid, or FAFSA, does not consider money in a Roth as available to pay for college expenses. Otherwise, half of student income over $6,600 will count towards any financial aid.

Filing a tax return also helps families expand their opportunities to take advantage of education tax credits. College students are eligible for the U.S. Opportunity Tax Credit, which allows filers to claim a maximum tax credit of $2,500 per student for each of the first four years of college, as well as the lifelong learning, which is worth up to $2,000 per year. year per student for an unlimited number of years. Taxpayers can choose which credit they will take in a given year, and they can take different credits for different dependents. They cannot take both credits for a student in the same year.

Both of these credits have income limits: a phase-out for single filers with between $80,000 and $90,000 in annual income, and between $160,000 and $180,000 for married couples filing jointly. Earn more than $90,000 as a single filer or $180,000 as joint filers, and you can’t take either credit at all. Parents might earn too much to claim either credit.

However, a student who files a tax return may have low enough income to qualify for these credits, if her parents do not claim her as a dependent. The IRS allows parents to declare students as dependents up to age 24, but it is not required. By not claiming a student as a dependent, parents lose a $500 dependent credit, but the student can get a much greater credit.

A student filing her own dependent could also get the final $1,400 of pandemic stimulus money, which was sent as an advance tax credit based on 2019 and 2020 IRS information. But this is only if his parents have not already received this money. in his name – a detail that the IRS and accountants are likely to check.

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