Teens and Income Taxes

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.

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.

How to File Your Taxes as a Teen

Filing taxes as a teen isn’t that different from filing taxes as an adult, but it can be a little overwhelming if it’s your first time. Having a simple checklist to follow can make the tax-filing process easier.

Step 1: Figure Out If You Need to File

As mentioned, making money as a teen doesn’t always mean you have to file a tax return. Knowing what kind of income you have (earned or unearned) and how much you made for the year can help you figure out whether or not you need to move ahead with filing a return.

If you worked a job that required you to complete a Form W-4, you should get a W-2 form in the mail from your employer sometime in January.

That form will break down your income for the year. If you were self-employed, then you’ll need to add up your income yourself to see what you made, unless you were an independent contractor. In that case, the person or business you did contract work with would send you a Form 1099 showing your income. Investment income is reported on Form 1099 as well, but the form you get will depend on what kind of income it is. For example, you’ll get Form 1099-DIV for dividends and Form 1099-INT for interest income.

Step 2: Organize Your Information

If you know you’ll need to file a tax return, the next step is rounding up all the information you’ll need to complete a return. That includes:

• Your Social Security number
• W-2s, if you worked a job
• 1099s from self-employment
• 1099s for investment income

Teens with a side hustle or business will also need to organize receipts for any expenses they plan to deduct. So a teen who runs a lawn care business in the summer could write off things like gas or oil, but to do that, they would need receipts for those purchases.

Step 3: Choose a Tax-Filing Software

You could fill out a paper tax form, but that can take a lot of time and get confusing if you’re not sure what goes where. The easier way to file taxes as a teen is to use a tax software program that walks you through everything you need to include.

The IRS offers a list of tax software programs that you can use to file your federal tax return for free. Keep in mind that if you use the same program to file your state tax return, you might have to pay a separate fee for that.

Step 4: Complete Your Return

Once you choose a tax-filing software, you can get to work filing your return. That could take a few minutes to a few hours, depending on how complicated your filing ends up being.

Here’s what you can expect to do to file your return:

• Start with the basics. Enter your personal information, including your name, date of birth, and Social Security number.
• Choose a filing status. Your filing status tells the IRS which tax rates to apply to your income. Unless you’re married, you’ll choose “single” here.
• Report your income. At this step, you’ll use your W-2s to enter information about your employer, income, and amount of tax you paid for the year. This information is included in different numbered boxes on your W-2, but your tax software program should tell you where to find it. The program should also prompt you to enter other income, including money you made from self-employment or investment income.
• Choose your deduction—standard or itemized. A deduction allows you to subtract a certain amount of money from your taxable income. The IRS gives you a choice of standard or itemized deductions. Most teens will choose the standard deduction, unless you run a business and have a lot of expenses that you want to write off.
• Check for tax credits. Tax credits reduce what you owe in taxes dollar for dollar. Tax-filing software programs usually have built-in checks that will review your return for you and look for any credits that you might be eligible to claim.
• Sign and submit. If you’ve entered all of your information, you’ll have a chance to review your return and make sure everything is correct. At this point, you should be able to see whether you owe taxes or are getting a refund. If you’re getting a refund, you’ll need to tell the IRS where to send it by entering your bank account information. Once you’ve done that, you can electronically sign and submit the return.

After you file your federal return, you might be asked if you want to file your state return as well. If you decide to do that, the program can transfer your information over and complete your state return in a matter of minutes. You can then review it, see what you owe or stand to get back, sign it electronically, and submit it.

What if you owe taxes? You should still file your return, but you’ll need to arrange to pay what you owe by the tax-filing deadline. If you don’t pay on time, the IRS can charge penalties and interest, which can add to the total you owe.

The Bottom Line

Filing taxes as a teen doesn’t have to be confusing if you understand when you’re required to file. Talking to your parents about taxes and when you’ll have to start paying can make the process easier to navigate. You can also discuss the best ways to use your tax refund if you expect to get money back.