Sunday, March 29, 2015

Make Your Teen File Taxes!

I've signed and approved thousands of work permits at school.  I'm quite happy to do so.  There's nothing more impressive to me then a teen with a minimum 2.0 G.P.A. and a desire to make money, for whatever reason.  During the school year, teens can start working as soon as 14 provided they do not go beyond the limited amount of work hours per week.  These vary with school district and the labor laws of each state.  As teens get older, they can work more hours during the week, subsequently earning more money.  Earn more than $6,200 in income for the year, and your teen must file taxes.  But what if your teen earns less than this amount?  Is it worth it for them to file taxes?

Don't bother having your teen file taxes if,

  • They made less than $2,000.  First, to save on the actual job of filing, they will have to do the work themselves.  Your cheapest tax preparer will charge them between $50-$100.  They may not get this back in the form of a refund.  If your teen elects to file their own taxes, they will need the software for it.  TurboTax has a free Federal filing edition, but it will cost $29.99 to transfer the file for State filing.  A key lesson to teach your teen is the monetary value of time.  So, $29.99 (their cheapest option to get both Fed and State filings) plus 1-2 hours of their time in the chair, clicking and uploading, and now you're up to…$39.99 if they get paid $10/hour e.g. or more!  However, if you want your teen to learn about taxes and the responsibility they entail come April, then the dollar amount they spend to file will be well worth it.  You got my approval to sit with them and guide them through the process first time out.  Make sure they take notes so they can do it on their own the following year!

How Work Allowances Become A Key Lesson for Parents and Teens: 

It's with 16-17 year-olds that learning to file taxes becomes a key lesson in high school.  But there is so much more to this lesson.  Let's start with when your older teen first gets their job.  Here comes the employer provided W-4 form…"Mom/dad, what do I put here where it says, 'allowances'?"

I love this question.  Other than, "what's sex?," it is one of the best teachable moment type questions you could ever receive as a parent.  This is where you get to discuss with your child what they will be doing with their earnings.  This is where you can justify your being what they hate at this time of their lives: intrusive.  This is where you can introduce the concept of investing!  Unfortunately, many parents lose out on this opportunity, simply giving their child an answer, "Put '1,' honey."  Parents, stop being lazy!  If you have no idea why I'm insulting you, start here: Breakdown-w-4-allowances.

Scenarios: Your Teen Says…

1) I'm saving all my money for a car
2) I'm saving all my money for college

Noble…but they're lying to you.  All teens spend and can't biologically understand the concept of delayed gratification.  Trust me…I've worked with them for 14 years.  They will spend some of their check on clothes, a phone, food, etc.  Because they're teens and don't have the actual ability to leave money in the bank without temptation, tell them to put a "0" for allowances.  Explain to them that they will have more taxes taken out, a smaller check, but they will have a better tax refund.  Tell them that you appreciate their goal, but that this way they if they do tap their account, they won't completely undermine what they are trying to accomplish.  Everyone's happy.  Also, have a conversation with them about how much (%) of their check they intend to save.  If they say, "All of it!," go back; make sure that if they are bent set on actually saving 100% of their earnings, that they understand they will not be taking any money out of their bank account for ANY reason.  Suggest 80(save):20(for spending) if they don't have a clue.  

Credit for Pic

3) I'm going to save a little and use some to pay my phone bill.
4) I'm going to save a little and use some to pay my car insurance.

Nice job, mom or dad!  If your teen says this, most likely you have directed them to get a job so they can keep what you gave them.  You may have bought them the phone or the used car (please not new unless you're wealthy, and if you are you wouldn't be reading this blog) but you are making them pay for their bills.  Here, cash is an immediate need so tell them to put a "1" for allowances.  And yes, they should file taxes too.  If they are this responsible, they can learn about taxes in full.  Just like 1 & 2 above, you're going to want your teen to define, "a little."  Ask them, "What percentage of your earnings do you want to save/spend?"  Make them commit to this by having them come to you with their first paycheck.  Have them show you what they made and ask them how much of it they are going to withdraw in the form of cash once they deposit the check.  "Is that X percent, just like you said?"  From this point forward, it will be entirely up to them to stay disciplined to their strategy: pay their bill, use some $ for whatever they want, save the rest.  Parents, stay out of it.  They have to learn budgeting genuinely for it to stick.

For a similar viewpoint on whether or not your teen should file taxes, go here (Tax document record keeping is a great insight shared in this article): Teen taxes
5) I want to invest my money

What about that money conscious teen that understands that investing is a great thing they can start doing with their job money?  Now this "allowances" question turns into one of expected returns and investments (risk).  You can talk about Uncle Sam getting an interest free loan with your teen's money with a "0" allowance.  You can discuss whether or not putting a "2" would be a wise idea given the investment prospects and risk considerations.  You can pose the question, "When is it okay to pay taxes at the end of the year?"  (Trick question).

Thanks for reading!  @COsvaGomez. 

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