Your Teen Landed Their First Part-Time Job, Welcome Them to the World of Tax
Once your teen has started their part time job, there are always questions such as
- How much can they earn without having to file a tax return?
- Can a parent still take their teen as an exemption on their own tax return?
A person under age 19 or under 24 and a full time student can earn as much as the current standard deduction without filing a tax return as long as the parent provides over half of the teen’s support and the teen lives in the parents’ home over 6 months in that year. Being away at college qualifies as being at home. The standard deduction for a single person in 2017 is $6,350. So in the case of the teen earning $6,350 or less, the teen files no return and the teen is listed as an exemption on the parents return.
If your teen is hard working enough to earn over the standard deduction, they will have to file a tax return. Parents and teens need to decide the most beneficial way to apply the exemption. Since the parents will probably be in a higher tax bracket than the teen, it is probably better for the parents to take the exemption on their own return. A quick calculation can determine the tax savings. Start by applying the exemption to both returns noting the tax due. Then compare to returns prepared without the exemption. You will see the tax savings produced by the exemption on both returns. File the return with the exemption resulting in highest tax savings. Let’s say the parents saved $2,000 taking the exemption and their teen saved $250 taking the exemption. The parents would take the exemption on their return saving $2,000 and would be free to write the teen a check for $250 if they choose. This way the parents would still save $1,750 ($2,000 - $250) in tax and the teen loses nothing.
If there is withholding on the teen’s W-2, then a return must be filed to obtain the withholding. If under the standard deduction, you have the choice of not filing a return and walking away from the withholding. Therefore your teen should file “exempt” on the employers Form W-4 when they start as a new employee. Filing exempt is allowable as long as your teen has a reasonable belief that no income tax will be due in that year. This way there will be no tax withheld and no individual tax return will have to be filed to obtain the withholding.
Be aware there are two other reasons a teen would have to file a tax return. The first reason is they are self-employed and earn over $400 in net income (gross income minus expenses necessary to earn the gross income). The second reason is receiving over $1,050 in unearned income such as interest and dividends.
Call H&S Accounting LLC to have your tax returns prepared. We are CPAs and tax professionals specializing in tax saving ideas that save you money and give you peace of mind.
Tim Walch CPA
H&S Accounting LLC