School is out for the summer. For many high school and college aged young Americans, that means the start of a summer job. The U.S. Bureau of Labor Statistics reported that 18.6 million youth between the ages of 16 and 24 were employed last July, and we can expect close to the same number on payrolls this year.
In addition to providing some extra cash, summer jobs are a great opportunity for young Americans to learn about income taxes, and also to increase their personal financial literacy by understanding that taxes are not just automatic and don't always result in a refund. As a parent and a tax professional, I know firsthand the importance of preparing children for financial responsibilities, and now is an excellent time to start that conversation and develop skills that will pay benefits over the course of a lifetime. With that, here are five things every parent needs to know before talking to their children about the tax implications of their summer job:
- Tax rules for claiming working dependents -- Tax rules for a dependent child are different than the rules for any other type of dependent. A dependent child can have any amount of income and still be claimed as a dependent, as long as he or she does not provide more than half their own support. This includes gifts, entertainment, food, shelter, clothing, purchasing a vehicle, maintaining a vehicle, other forms of transportation and school expenses. Any other type of dependent who receives more than3,800 income in 2012 cannot be claimed as a dependent, even if a legal guardian provides more than half of their support;
While there is little impact on the parent's tax return when a dependent child works, it can be difficult for a teenager to think about how a summer job can affect their tax return the following year. Understanding the tax implications now can help young taxpayers make smart decisions to lower their tax expenses and possibly increase next year's income tax refund. Those who tend to get the largest tax refunds are those who plan their tax strategy throughout the year, not just at tax time.