My brother and I have been working since we were in our early teens. Like many teens, not knowing anything about taxes, I just let my dad take care of any necessary filings until I moved out at age 18.
When Should You Start Filing Tax Returns?
Taxes are intensely more complicated today than they were when I started college and began filing my own tax returns. You can’t just jump into your own filings anymore without affecting your parents’ tax returns. There are kiddie tax rules and rules for students who may be dependents on their parents’ tax returns until they are 23 years old. It’s enough to make you scream!
There are two distinct situations to consider: teens with jobs and teens with investment income.
Teen with Jobs
As a teen or student, you may feel as if you are a protected class. We get discounts. Adult rules don’t apply to us. We don’t have to pay taxes. I know that’s how I felt.
Well…it doesn’t quite work that way.
“Exempt” is not the right choice to put on your employer’s W-4 form. Even if you earn as little as $3,650 in a year (from all sources), you are likely to face income taxes.
Freelance income is taxable even sooner. Once you have $400 in profit, you must pay self-employment (SE) taxes. That’s normally 15.3 percent of your profits. For only 2011, SE tax has dropped to 13.3 percent.
When reporting income on Schedule C, you can deduct your business-related expenses. If you are paying for your own Internet service, hosting, software, texting, supplies, etc., your freelance earnings of $1,200 might be reduced to less than $400.
When you file your own tax return, be sure NOT to claim yourself as a dependent. Kids under age 18 are always dependents on their parents’ tax returns. Students under age 24 suffer the same fate.
Teens with Investment Income
Parents and grandparents can be very generous, giving you gifts of money or stocks. Since that was a clever way for parents to move profits to a lower tax bracket, Congress closed that loophole, taxing the investment income of children under 18 at their parents’ highest tax rates. Recently, Congress raised the age limit to 24 for students who are still dependents of their parents.
The Tax Code has a unique definition of investment income for children. It doesn’t mean just dividends, interest, and capital gains. It turns out that for children, “investment income” is any income that isn’t wages or self-employment income.
If you have investment income of $1,900 or more, you need to either file your own tax return using Form 8615 or have your parents report your income on their tax return using Form 8814.
The Bottom Line
It’s good to get the experience of preparing your own tax returns, and it’s important to know when you have an obligation to file a tax return. However, it’s wise to coordinate your filings with your parents—and to have your parents review your tax returns before you file.