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Facts to teach your kids about taxes
Submitted by JoyM
Fri, 16 Aug 2013
Taxes are one of the most important aspects of every person's financial life. It is up to you to make sure your children understand the different types of taxes and how they work. Listed below are some tax facts and information that can help you when you want to start teaching your kids about taxes.
• IRS Form W-4- Whether they graduate and get a job, are working part time, or are working only during the summer months, this form will likely be one of the first tax documents your kids will be asked to complete. It is important that you explain to them the purpose of the form, exemptions, and dependents. If you can claim your kids as your dependents, they will only need to complete the form with their names, social security numbers, and address and to write the word exempt on line number seven. However, you can only claim their exemption if their income does not exceed $1,000 and if they do not have more than $350 of unearned income. If they qualify, the exemption will prevent their employers from deducting federal and state income taxes. Keep in mind, though, that if your children are already working full-time and have multiple sources of income, then they should consult a tax professional before completing the IRS Form W-4.
It is also important to tell your children that when they receive their first paycheck, it is crucial that they check their paystubs to determine which taxes were withheld. If they completed Form W-4 as "exempt" from withholding, then there should be no entries in the boxes for federal and state income tax withheld. If they work in the family business and are under the age of 18, they are not required to pay Social Security and Medicare taxes. On the other hand, if they work outside the family business, then they should expect that 7.65 percent of their gross pay will go to Social Security and Medicare taxes.
• W-2 Form- Remember to inform your children about the W-2 form that they will receive at the start of the year. This is the form that contains the summary of their pay for the prior year and has listed the total amount of taxes withheld from their pay. Copies of this form are submitted to the IRS and the state government taxing agency by their employer. This informs the taxing agencies how much money was earned and how much in taxes was withheld. This form also determines the potential liability for taxation. It is important that your children update their address and personal information with their employers should any of it change. This will ensure they receive their W-2 form on time. Once they meet the filing requirements, they must file an income tax return and pay any outstanding liabilities they may have. If more tax than they owe was withheld from their wages, then they might expect to receive a refund of the excess income tax withheld.
• Checking filing requirements- It is very important to check the filing requirements to make sure your children aren't paying more or less than is expected of them. For example, the 2012 filing requirement for an individual who is single was $9,750. If the money that individual earned was less than this amount, then they are not required to file a tax return. Keep in mind that while paying more in taxes than what you owe can be a hassle, paying less than what you owe can be really damaging. If you get your credit scores checked and notice that they have decreased even if you are being financially responsible, you might want to make sure that you haven't missed any payments to the IRS. Not paying exactly what you owe will cause the IRS to file a tax lien against you, which could seriously hurt your score.
• Filing tax returns- Show your kids how to file tax returns by visiting the IRS Free File website, where they can learn about the steps required to file their taxes one by one. Electronically filing their income taxes will come at no cost to them. Just remind them that if you are claiming them as dependents, they should check the box indicating that they are dependents on your tax returns. In addition, if they are living in a state where they are required to file a state income tax return, tell them that they should go to their state's government website and file their income tax returns there as well.
Taxes are probably some of the most complex financial aspects to teach to your children, but the sooner your kids learn about them, the sooner will they be able to understand them and file them correctly.
Joy Mali is an active finance blogger who is fond of sharing interesting financial management tips to encourage people to manage their personal finances. More specifically, she advocates that people should check their credit reports and credit scores on a regular basis. Follow Joy and discover money management tips that parents can teach their kids.
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