Most teens don’t know when (or if) you need to file taxes for that year and are missing out on getting money back that was paid in from paychecks at after-school jobs in the tax return at the end of the year.
And teens that file their own taxes and are not claimed as dependents by their parents could qualify for FAFSA and scholarships for college that they may not have qualified for if they weren’t filing their own taxes. This benefit alone is worth considering and doing more research on to see if this is something you are eligible for that could help you afford college!
Let’s talk about why taxes are important for teens and how filing as a teen is different from filing as an adult!
Why Taxes Are Important
First of all, what are taxes, and why do we pay them in the first place?
Taxes are the primary way governments bring in money. Money collected from taxes goes towards funding things like public schools, fixing roads, paying for emergency services like fire departments, and maintaining public buildings or parks.
Social programs like Social Security and Medicare are funded by taxes. In short, governments would not be able to maintain the infrastructure that we rely on if they didn’t collect taxes.
How Taxes Work In General
For most teens, filing a “Simple Tax Return” is best because you don’t have many tax credits or deductions to file for as a teen. To file this type of tax return, you will need:
- W-2 from your place of employment. Most employers send out the W-2 in January to your address on file. A W-2 is an explanation of income and benefits received from your job during the year as well as how much was withheld from your checks in taxes.
- Your legal name and birth date. The IRS doesn’t care about nicknames so enter your full legal name as it appears on your birth certificate or Social Security card.
- Your Social Security number. If you don’t know it, it should be on your W-2 or your parents might have your Social Security card in with their important paperwork.
Net Income vs. Gross Income
When you receive your first paycheck from your first job, you expect to be paid the hourly wage you agreed to multiplied by the number of hours that you worked, right? That is your gross income (money earned BEFORE taxes are taken out of your check).
Net income is the actual amount of money you take home after taxes are taken out.
There are many different kinds of taxes collected from many of the things we use or buy daily and from jobs worked or property that is sold for a profit.
On a Federal level, the Internal Revenue Service (IRS) collects a certain percentage of wages earned from jobs based on the worker’s annual earnings. The current federal tax brackets for unmarried filers are:
- 10%- $0 to $9,950 annual earnings
- 12%- $9,951 to $40,525
- 22%- $40,526 to $86,375
- 24%- $86,376 to $164,925
- 32%- $164,926 to $209,425
- 35%- $290,426 to $523,600
- 37%- $523,601 and higher
Many people don’t understand that your entire annual paycheck is not taxed at the rate you earned for that year. The first $9,950 you earn for this year will be taxed at 10%, so $995. The next tax bracket is a 12% tax on earnings up to $40,525.
Let’s look at an example:
Your income for this year is $75,000. Congratulations! That is a great earning rate for a teen!
The first $9,950 is taxed at 10% ($995).
The next $30,574 is taxed at 12% (3,669).
The last $34,475 is taxed at 22% (7,585).
The total federal tax bill for the year is $12,249
Before you think, “That’s way too much money to pay in taxes!” that’s why you file for a tax return at the end of the year! The government offers tax credits and tax deductions based on your specific situation, allowing you to qualify for the tax refund.
State Income Taxes
Vary by state, and a separate refund is filed with the state at the end of the year.
Vary by city, county, and state. These taxes are charged on purchases like fuel, clothing, and food.
Paid to the city or county for real estate owned based on the tax assessor’s estimation of the property’s value.
How Taxes Work for Minors
Not all minors need to file tax returns, but it makes sense when:
- Taxes have been withheld from a job
- The minor would qualify for a refund like the American Opportunity Credit
Filing taxes are required when:
- Unearned income from investments is more than $1,100
- Earned income exceeds $12,550
- If the child is blind, unearned income exceeds $2,800 or earned income exceeds $14,250
Minors that file tax returns but are claimed as a dependent on a parent or guardian’s return must indicate on their own return that they will be claimed as a dependent for that tax year.
How Taxes Work As An Adult
Most adults pay taxes out of their paychecks and are eligible to file a return at year-end, but those with businesses might need to file taxes quarterly and qualify for different deductions based on what type of business they own.
Tax filing statuses get a little more complicated.
- Single (legally unmarried or separated awaiting divorce)
- Married filing jointly (spouses file one tax return together)
- Married filing separately (spouses file two separate returns)
- Head of household (unmarried, paid more than ½ of household expenses for the entire year, another adult lived in the household for more than half of the year)
- Widower with dependent child (This can be used for 2 years following the death of your spouse so long as you don’t remarry during this time)
Single tax filers have the hardest time claiming deductions and credits as adult filers, so they typically end up paying more in taxes. Head of household offers more opportunities for deductions and credits IF the filer meets all of the criteria for this filing status.
Download our Kids’ Money taxes worksheet to help you practice completing important tax forms!
Refundable federal tax credits for employees include:
- Earned Income Tax Credit: Singles qualify if they made less than $21,430 for 2021 and the credit is worth up to $6,728
- Child Tax Credit: This is meant to help lower income families offset costs of raising kids and is $3,600 for each child under 6 and $3,000 for each child age 6-17.
- American Opportunity Tax Credit: This is meant to help with higher education costs for full time attendees of 4 year institutions. It’s worth up to $2,500 per student.
Tax deductions reduce how much of your income is taxed to begin with which may push you into a lower tax bracket and reduce your overall federal tax burden.
How to Talk With Your Parents About Taxes
Having conversations about personal finance fundamentals like taxes early in life will set you up for success later. Parents don’t always know how to start hard conversations, so you may need to start the conversation.
Keep in mind that taxes can be complicated, and not every parent will fully understand taxes or explain them. Ask your parents how they file their taxes or for references to professionals in your area that you could sit down with to ask questions. Learning things together makes life fun, so involve them if they want to learn with you!
Starting the conversation in high school or before starting high school will allow you and your parents to maximize tax returns that could help when you begin applying to colleges.
- Taxes: A percentage of earnings paid to the government that is used for public uses and programs.
- Unearned income: Money that is not made from a job or business. Usually, this money is made from investments or passive sources.
- Earned income: Money earned from a job or business.
- Tax credits: Money that taxpayers can legally subtract from the amount of taxes they owe.
- Tax deductions: Money that taxpayers can legally subtract from their income that can lower them into a lower tax bracket.
- Gross income: Income on your paystub before taxes are taken out of your pay
- Net income: Final income listed on paystub after taxes have been taken out. This is the amount that will be deposited into your bank account if you choose electronic deposit.
Books and Other Resources to Learn About Taxes
- IRS.gov “Understanding Taxes”. Why not learn directly from the IRS about taxes? This course is meant for high school teachers and students to learn together and to work in a group environment but could be read through as an individual that wants to learn the basics.
- Econ Ed Link “Tic Tac Taxes”. This educational platform has full webinars on personal finance and economics for grades K-12 that cover topics like taxes, compound interest, and voting.
- National Safe Space Network Tax Assistance Services. If your income or your parents income is less than $53,000 annually, you qualify for tax filing help for FREE and they have resources available to educate on safely filing taxes to avoid potential scams.