Earning money as a teen can be a great first step toward financial independence, but there’s one important thing you can’t afford to overlook: taxes. Just like adults, teens have to pay federal and state income taxes once their income hits a certain threshold.
If you’re a teen working a part-time job, summer job, or side hustle, it’s important to know when you’re subject to tax and how you’re expected to pay it. This article from Investopedia highlights helpful information to get started.
Do Minors Have to File Taxes?
There’s not a yes or no answer to whether minors have to file a tax return, as it depends on a teen’s individual situation. Being a minor doesn’t exempt a teen from paying taxes, but it doesn’t necessarily mean that they’re required to file a separate tax return from their parents. As a general rule, most U.S. citizens and permanent residents need to file a tax return if they make more than a certain amount for the year.
The two main factors that determine whether a minor has to pay taxes or file their own tax return are their dependency status and their income.
Dependency Status
Minors who qualify as dependents on their parent’s tax return don’t have to file their own return until their income exceeds certain limits.
Generally, to be a dependent, a minor must:
- Be under age 19, or under age 24 if attending school full time
- Live with their parents for more than 50% of the year
- Not provide more than half of their own financial support
Dependents can include children or other qualifying relatives. For instance, a teen who moves out of their parent’s home and lives with a grandparent or an aunt could be claimed as a dependent by one of these other relatives if they meet the above rules. Additionally, a dependent must be unmarried and a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico.
Assuming a minor meets the dependent test, the next step in determining whether they need to file a tax return is their income. As mentioned, specific income limits decide when a teen has to file their own return.
Income Thresholds
There are two types of income that the Internal Revenue Service (IRS) uses to determine when a teen has to file a tax return: earned and unearned.
Earned income is money made from working and includes salary, wages, tips, professional fees and any other amounts received for work performed. So, if a teen is making money by working part time at a local fast food restaurant or cutting grass on the weekends in the summer, that’s earned income.
Unearned income is income from investments and includes interest, dividends and capital gains, rents, royalties, etc. The IRS also considers distributions of interest, dividends, capital gains, and other unearned income from a trust to trust beneficiaries to be unearned income.
Here are the income thresholds for each type of income for the 2022 tax year:
- $12,950 for dependents with earned income
- $1,150 for dependents with unearned income
Now, things can get a little confusing if a teen has both earned and unearned income. In that case, they would need to add their earned and unearned income together to see if it triggers a tax-filing requirement. For 2022, teens with both types of income would need to file if their combined gross income is greater than $1,150, or greater than their earned income (up to $12,550) plus $400.
Let’s say, for example, that a teen has $1,200 in unearned income and $13,000 in earned income. They would pass both prongs of the test and, as such, would need to file a separate return. Now, say that a teen had $200 in investment income and $600 in earned income. In that case, they wouldn’t need to file a return since their total income of $800 ($600 in earned income + $200 unearned) is below the $1,150 limit.
Filing a Return with a Part-Time Job
Teens who work a part-time job may or may not need to file a tax return, depending on their income. If they only have earned income for the year, their income does not exceed $12,950, and their parents claim them as dependents on their tax return, then they don’t need to file.
However, it may still be a good idea for a teen to file if their employer was withholding taxes from their paychecks throughout the year. In that case, they could get all of that money back in the form of a tax refund.
What Income Isn’t Subject to Taxes?
The IRS distinguishes between taxable and nontaxable income. Generally, any amount of money included in income is taxable unless otherwise specified by law.
Here are some of the most common types of nontaxable income:
- Inheritances, gifts, and bequests
- Cash rebates on items you purchase from a retailer, manufacturer, or dealer
- Alimony payments you receive if you divorced after 2018
- Child support payments
- Most healthcare benefits
- Reimbursements from qualifying adoptions
- Welfare payments
- Life insurance death benefits
- Scholarships
Again, keep in mind that even if a teen has taxable income, they don’t necessarily need to file a tax return if their income doesn’t exceed the annual limit.
When a Minor Has Capital Gains
Capital gains occur when you buy an investment for one price, then sell it at a higher price. If a teen has investments that produce capital gains, such as stocks or mutual funds, they may be subject to what’s called the kiddie tax.
Parents (or teens) can use IRS Form 8615 to figure the kiddie tax. You only need to include this form with a child’s tax return if all of the following conditions are met:
- A child’s only income is from interest and dividends (including capital gains distributions), and that income exceeds $2,300 for the year.
- The child was under age 18 at the end of the tax year, or was 18 at the end of the tax year and didn’t have earned income that provided more than half of their financial support.
- The child was a full-time student age 19 to 24 who didn’t have earned income that provided more than half of their financial support.
- At least one parent was alive at the end of the tax year.
- The child is required to file a tax return for the year and is not filing a joint return.
If a teen’s only income comes from capital gains, interest, or dividends and the total is less than $11,500 for the year, parents can elect to report that income on their own tax return instead of filing a separate one for their child.