MADISON, Wis. (2/27/08)--With the looming April 15 tax deadline, it's a good time to teach working teenagers about money and taxes, says the Credit Union National Association.
Many teenagers don't understand that the total amount they earn isn't all "theirs." According to Denise Witmer, author of the book, "The Everything Parent's Guide to Raising a Successful Child: All You Need to Encourage Your Child to Excel at Home and School" and contributor to About.com, teenagers can benefit from some key lessons about income taxes:
Be familiar with some tax forms. The teenager will fill out a W-4 form when starting a job, and deductions will appear on the pay stub. Explain these forms with the help of irs.gov or suggest he talk to the employer's personnel department. At the beginning of the next year, he'll receive a W-2 form needed when filing taxes. And if he was self-employed--mowing lawns, for example--he even may need to fill out a Schedule C form.
Age is not a factor in paying taxes. If your teenager receives a paycheck, explain that the company will deduct taxes from the gross or total amount paid. If she makes more than a certain amount in a given year--$5,350 in 2007--she'll have to file an income tax return and pay taxes. If she makes less than that, she may be due a refund but can get it only if she files an income tax form.
Money from babysitting and mowing lawns is considered earned income. Your teenager must pay self-employment taxes if the amount is more than the Internal Revenue Service's limit for the year--$5,350 for 2007.
Unearned income of $850 or more must be reported. This could include investments, dividends or interest, or capital gains. If the teenager has both earned and unearned income, she needs to file a tax return if earned-plus-unearned income totals $850 or more, or if earned income plus $300 is more than $850.
Tax money helps run the country. Taxes U.S. citizens pay are vital for public schools, police and fire services, repair of national highways, military spending, aid to foreign countries, and more. Without taxes, these services may not exist.
Emphasize the importance of saving. Feb. 24 through March 2 is America Saves Week. Take advantage of teachable moments--such as when a child starts to earn money--and help the child set savings goals and make plans to reach those goals. When it comes time to buy a car or shop for a mortgage, good saving habits early on can mean the difference between financial independence and financial instability in adulthood.
For more information, read "Taxes--Just Do It" in Googolplex.
courtesy of cuna.org