Q. My 17-year-old son worked as a lifeguard this summer at our local swimming pool. Does he need to file a tax return next April?
A. It depends on how much he earned on the job and how much he earns from any investments in 2009.
Kids who are claimed as dependents on their parents’ returns must file a tax return if they earn more than $5,700 from a job in 2009. If your son earned less than that, he may still be required to file a return if he earns more than $300 for the year from any investments in his name, such as from a bank account, mutual fund or custodial account. (If he didn’t have a job this year, he’d still have to file a tax return if his investment income is more than $950 in 2009.) For more information about the tax-filing rules for children, see IRS Publication 929, Tax Rules for Children and Dependents, at irs.gov.
Even if your son isn’t required to file a tax return, he will want to do so to get back any money his employer withheld from his paycheck. He won’t be able to get back any wages that were withheld for Social Security taxes, but the work he did counts toward his future Social Security eligibility.
And because he had a job, he is eligible to open a Roth individual retirement account, which can give him a huge head start on retirement savings. The maximum IRA investment in 2009 is $5,000 for anyone younger than 50, but you may not contribute more than the total of your earned income for the year. So if your son earned $4,000 over the summer, he can invest up to $4,000 in a Roth.
Few kids want to invest all their summer earnings in an account they won’t tap for years. But you can give him the money to make the contribution or offer to match his contribution dollar for dollar (as long as the total doesn’t exceed the amount he earned for the year or $5,000, whichever is lower).
That money can grow substantially over the years. If a 17-year-old invests $4,000 now and earns 6 percent per year, he could have more than $73,000 by the time he reaches age 67. He may withdraw his contributions tax- and penalty-free at any time, and his earnings are tax-free after age 59 1/2. If he gets started in the saving habit and invests $4,000 every year until retirement, then he could amass an account worth about $1.3 million by the time he’s 67, again assuming a 6 percent annual return.
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