Taxes for Teens: Understanding Taxes and Financial Literacy Beyond the Classroom©

By: Katherine Paxson
12th Grade Student, Washington International School

Introduction

Why did I create this manual?

As a teen or young adult, have you ever wondered when you need to start paying taxes and how to do them? I am passionate about this project because ever since I have been little I have been asking myself many questions about financial literacy, and wondering – What do I need to know about taxes and how to do them?

Many studies have demonstrated the importance of financial literacy on people’s decisions and lives (Lusardi). Some states require financial literacy education in high schools, but many schools don’t even teach financial literacy and how to prepare for life (NGPF). Surveys show that financial literacy is very low in the US, especially amongst young people and females (Lusardi). Less than 30% of respondents in the National Financial Capability Study (NFCS), collected by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation, could answer three basic financial literacy questions correctly.

I researched approximately 50 sources, and discovered that financial literacy textbooks, numerous online resources like Investopedia and even websites created to teach financial literacy are very hard for teens and young people to understand, because adult authors do not realize how little we know about the process and the vocabulary. For example, these sources usually assume that we know what the words “tax return” or “file taxes” mean, but we don’t, and until I started working on this project, I didn't even know these words. I now know that a “tax return” is a tax form you submit to the government (and that it’s different from a “tax refund” and that submitting it is called “to file”), but it still seems strange that it is called a “return”.

To solve this problem, I decided that I would just create a simple manual myself, in normal non-tax language, so that we could learn at a younger age how taxes work and what to expect when the time comes.

In addition to my research, I collected comments on my manual from four prominent experts, including the Head of Tax at Fidelity, one of the largest investment banks, two tax lawyers and a Certified Public Accountant. I reflected their comments in this manual.

During my research, I learned that there are over 200 types of taxes in the US. I even discovered that there was a beard tax in the 17th century in Russia, where you needed to pay to be able to grow a beard and walk around with a token to prove it! The U.S. Tax Code is 6,871 pages, and with rules and regulations, is over 70,000 pages - that is over 23 feet, or almost 2.5 floors high. But I will only summarize some main points and tips that are useful for teens and young people.

Do you ever wonder when you need to start paying taxes?

• This is an important question since you can go to prison if you don't.
• You could also lose a lot of money in tax penalties.

The need to prepare tax forms and pay taxes depends on whether the money you received that year (your “income”) is “earned” or “unearned.” “Earned income” is the amount you receive for any work, full-time or part-time, official or unofficial (like babysitting), or running your business. “Unearned income” is from sources other than work, usually from investments.

Even as a teen, you have to worry about paying taxes if any of these criteria (also called “thresholds” - minimal levels) are true for any calendar year (below numbers are for the 2025 tax year):

• You earn $400 or more without an official employer (for example, by babysitting, having an online business, being an influencer) - because the government thinks you are "self-employed"; OR
• You earn $15,750 or more in an official job (full-time or part-time); OR
• You get $1,350 or more in "unearned income" (investments or savings, such as selling stocks or receiving dividends or interest; but if it’s below $13,500, you can ask your parents to put your income on their tax form instead of preparing your own); OR
• If you have both “earned” and “unearned income”, it's more complicated (you don't add $15,750 and $1,350; you need to file if your unearned income is over $450 (not $400 in this case) or your total is over $15,750; and you have to prepare your own tax forms instead of asking your parents to put your income on their tax form).

Good news: at least you don't need to pay taxes on the money your parents give you.
Bad news: babysitting, tutoring, tips - all of that is subject to tax.

You also have to think about taxes in order not to waste money to taxes by accident:

• If you want to save for college (or ask your parents to do that), there are ways to save much more if you are smart about taxes.
• Your employer may be taking part of your salary from you for taxes - so it might be a good idea to get back some of this money.
• If you want to invest or save your money, you may be losing a lot of what you gain to taxes, but there are tax-smart ways of investing.

I will explain:

• Part A - The Main Things You Need to Know About Taxes
• Part B - How to Invest and Save Money without Wasting It for Taxes
• Part C - How to Actually File Tax Forms and Pay Taxes
• Vocabulary (Financial Words You Need to Know)

Part A - The Main Things You Need to Know About Taxes

What Are Taxes?

Tax is an amount of money that you have to pay to the government so that it can pay for public services such as roads and schools. There are over 200 types of taxes, but the most relevant ones that teens and students need to pay to the government themselves, and can plan for in a smart way, are income tax and capital gains tax. We pay some taxes without even thinking about them. For example, if you look at receipts, you will see that we pay sales taxes when we buy something at a store or a coffee shop (we are also often supposed to charge sales taxes when we sell something). If you have an official job, an employer will keep some of your salary for taxes (you might later get back the amount they kept for income taxes, but you can’t get back the “payroll taxes” they deduct from your salary). When you buy real estate, you will also need to pay real estate taxes. In the U.S., there are both Federal and State taxes and they don’t always follow the same rules.

Income Tax Basics

(a) Earned Income / Ordinary Income

The money you earn, especially as “earned income” by working (but not by selling your investments), is often called “ordinary income”. Ordinary income is the most common type of income.

(b) What Is Income Tax

Income tax is a fee the government charges based on your earnings (earned income, ordinary income). For teens, this primarily means money earned from jobs or self-employment, and profits from investments such as dividends and interest (but not profits from selling investments).

(c) Income Tax Rates: Progressive Taxation

The U.S. uses a “progressive” tax system for income tax, which means that the more money you earn, the higher percentage of it you pay for taxes:

The amount called “standard deduction”, which is the first $15,750 of earned income, is usually not taxed.

Income tax “rates” (percentages of income that you need to pay as taxes) range from 10% to 37% (ranges of incomes that result in different tax rates are called “tax brackets”), but can be even higher due to some additional amounts.

Lower earners pay a smaller percentage than higher earners (but even higher earners pay 0% or 10% on the first $15,750 of their income).

For example, if you make $20,000, after a standard deduction of $15,750 you are taxed on the difference of $4,250, and your bracket is the lowest: below $11,925 - 10%.

But if you make $50,000, after standard deduction of $15,750 (if this is the only deduction you specify on your tax form) you are taxed on the difference of $34,250, and you are still taxed at 10% on $11,925, and then you are in the next tax bracket for the other amounts: from $11,926 to $47,375 the tax rate is 12%. Here are the 2025 tax brackets:

2025 tax rates for a single taxpayer

https://www.irs.gov/filing/federal-income-tax-rates-and-brackets

You can find these tax brackets on the www.irs.gov website. The States have their own, additional income tax rates, but some States don’t have income taxes at all (such as Florida - that’s why people like to retire there, in addition to the weather).

(d) Withholding: Don’t Let Employer Keep Part of Your Salary

Often when you work (full-time or part-time), the employer keeps some of your salary (“withholds” tax to send it to the government for you, and the process is called “withholding”). If you will earn less than $15,750 in a year and you don't expect to file a tax return, try to make sure that the employer does not keep some of your salary (withhold) for your income taxes. To do that, tell your employer, and when they give you form W-4 to fill in with your information for taxes, check the box for no withholding as a student. If you missed and didn’t do that and the employer withheld your taxes (you will later see that on your W-2 form that I will explain in Part C) but you don't owe tax (for example, if you are below the minimum amounts for taxes listed in the Introduction), maybe you still want to submit a tax form to the government so you could get the money back (called “tax refund”).

If your job is small, even less than part-time (for example, something you do just once), the employer will ask you to fill in a different form (W-9 instead of W-4), and at the end give you a different form (1099 instead of W-2). For these situations, the employer will not withhold your taxes, so you will then only need to submit tax forms to the government if you owe taxes, but not for a refund.

Also don’t confuse “withholding” income taxes with “payroll taxes.” Both are taken by your employer. “Payroll taxes” are used by the government for “Social Security” (to pay for people’s future retirement pensions) and “Medicare” (to pay for medical care) and are 15.3% of your salary. Half of that will be paid by the employer and another half (7.65%) taken from your salary, and you cannot get that amount back.

Capital Gains Tax Basics

(a) Capital Gains

You get profits from investments, called "capital gains," usually when you sell an asset for more than its purchase price (your original purchase price or investment is called “tax basis”). Capital gains can apply to different assets such as:

• Stock in a public or private company (stock is a tiny part of a company that you own/can buy/sell)
• Bonds (a tiny part of the money owed by the company, which the company now owes to you)
• Real estate (real property that has land and anything permanently attached to it/ built on it)
• Cars, boats, other vehicles
• Gems and jewelry
• Cryptocurrency and NFTs

These are “capital assets”. Some other asset types are classified as non-capital assets and are not subject to capital gains tax, but may be subject to other types of taxes (for example, clothes that are sold or licensing patents for inventions).

(b) What Is Capital Gains Tax

Capital gains tax is a fee you pay to the government when you have a capital gain (usually sell a capital asset at more than its purchase price).

It's important to understand that capital gains are only taxable when they are “realized”, which means that the asset has been sold. Unrealized gains (increase in value of an investment that hasn't been sold), are not subject to taxes.

Here is how it works in simple terms:

• Let's say you buy a stock for $1,000. A few years later, you sell it for $1,500.
• The profit you made is $500, and that $500 is called your "capital gain."
• You then have to pay a tax on that $500 profit (for the year you received that profit), and if your capital gains tax rate is 10%, you pay $50 in tax.

If you sell several capital assets so that you gain money on some and lose money on some others, you only pay tax on the difference if you gain at the end (called “net gain”). Technically, you might still need to file tax forms.

But you have to THINK about taxes much more than that, because you lose money without realizing it if you don’t.

(c) Tax Rate: Short Term and Long Term Capital Gains Tax

Before you make investments and before you sell them, it's crucial to consider the impact of capital gains taxes because holding periods (the time you own something before selling) significantly affect your tax amount. Capital gains taxes can be much higher if you don't hold your investments for at least a year.

1. Short-term capital gains (assets held for one year or less) are taxed as ordinary income, with rates that range from 10% to 37%.
2. Long-term capital gains (assets held for more than one year) benefit from preferential tax treatment, with rates of 0%, 15%, or 20%, depending on your income.

The difference in tax rates can largely impact your investment returns:

• If you sell an asset after holding it for 11 months, you might pay up to 37% in taxes on your gains.
• By waiting just one more month to sell, your tax rate could drop to as low as 0% or at most 20%.

For example:

If you buy $5,000 worth of stock and sell it for $5,500 after six months, you'd have a $500 short-term capital gain. In the 20% tax bracket, you'd owe $100 in taxes. However, if you held the stock for over a year and sold it for $5,600, you'd have a $600 long-term capital gain. In the 15% long-term capital gains bracket, you'd owe $90 in taxes (less taxes despite the larger gain).

Also, some investments are considered “collectibles” (such as art or special coins), and when they are sold, taxes will be higher.

(d) Special Capital Gains Tax Rules for Teens and “Kiddie Tax”

For teens with investment income, you need to pay taxes if your investment income in that year is over $1,350 (or $450 if you also have earned income).

Unfortunately, to avoid parents transferring money to teens so that we pay lower taxes on investments, the government invented “kiddie tax” which means that whether your parents file tax forms for you or you do it yourself, and whether you earned the money yourself or not, if you are under 19 or a full-time student under 24, the taxes will be:

• The first $1,350 of unearned income is not taxed
• The next $1,350 is taxed at the child's (usually low) rate
• Anything over $2,700 is taxed at the parents' (usually high) rate

Part B - How to Invest and Save Money without Wasting It for Taxes

When you want to save or invest money, you can choose taxable or tax-free accounts. Taxable accounts are standard investment or brokerage or bank accounts.

The key features are:

• You can contribute or take (called “withdraw”) as much as you want (unlike in tax-free accounts that are more restrictive).
• No tax benefits; earnings are subject to annual taxation (so you can end up with less money than you expected).

So before investing, think whether tax-free accounts or other special accounts, which offer significant tax advantages, are better (such as Roth IRA or College Savings Accounts described below). Keep in mind that you can make a lot of money with savings because of “compounding” (the process in which you do not use any earnings on your investments or other savings, but let them reinvest back to earn you more). That’s why, if you don’t have to pay taxes on these earnings, you save much, much more.

Taxable Accounts

If you still want to put your money in a taxable account, follow these rules to not waste money on taxes:

• If the account with “your” money is in your parent’s name (for example, a Robinhood account because you are under 18), you may end up wasting more money on taxes (because for you $1,350 a year is tax free, but not for a parent).
• You don't owe taxes because the value of your investments increases - only when you sell them. Be careful not to buy and sell all the time, because taxes on short-term investments (which you hold less than a year) are much higher than on long-term investments.
• If you receive "interest" (like in a bank account) rather than amounts from selling stocks or bonds, interest is taxed at a higher rate (same as ordinary income, up to 37%). So savings that make interest are very tax-disadvantaged.
• Also be careful when you sell for less than you bought (called "at a loss") - talk to your parents first. It's illegal to make the same investment within 30 days after that and not make a special point about it in the tax forms, which is very easy to miss.
• If you are careful to sell investments to make less than $1,350 with your investments per year and have no "earned income," or if you make investments from your Roth IRA (described below), it's much less to worry about in terms of taxes.

Roth IRA (a tax-free Individual Retirement Account)

Roth IRAs can be an excellent option for teenagers to start saving for the future since:

1. There is no age minimum for contributions, but your own “earned income” is required.
2. Contributions can be up to the teen's earned income (but not more than $7,000 a year; will be $7,500 in 2026).
3. Offers triple tax benefits: tax-free contributions (if income is low), tax-free growth, and tax-free withdrawals in retirement.
4. Custodial accounts are opened and managed by an adult until the teen becomes an adult age 18 - 21 depending on the state).
5. You can take (withdraw) your contribution any time you want, but taking the profits in the account before retirement can trigger some taxes or penalties; some profits can be taken out to buy a house or for other important purposes, but some taxes will need to be paid at that time.
6. Early saving can lead to significant growth through compound interest (interest calculated on the initial investment and on reinvested interest).

Parents or other adults can contribute to a teen's Roth IRA, but only if the contribution doesn't exceed the teen's earned income for the year (or $7,000 in 2025 if the teen earned more). So if you are earning money and your parents also have money - ask them to let you keep the money you earned and to put the same amount of their money into your Roth IRA.

This is how much more you will save:

Roth IRA Calculator — inputs: current balance $0; annual contribution $1,000; expected rate of return 10%; current age 15; retirement age 65; marginal tax rate 30%.

According to provided information, the Roth IRA account can accumulate $757,380 more than a regular taxable account by age 65.

“Roth IRA Calculator.” Calculator.net, 2024, www.calculator.net/roth-ira-calculator.html?cstartingprinciple=0&.

College Saving Accounts

When thinking about going to college, it's important to consider various college savings accounts that can help finance your education. You can set up these accounts yourself or ask your parents; many parents don't think of that - remind them. These accounts offer different tax advantages and benefits:

1. 529 Account (an account that uses a 529 Plan - a college saving plan that is a state sponsored investment plan that enables you to save money for education).
   • Money grows tax-free for education.
   • Can be used for college and some K-12 expenses.
   • Anyone can contribute; the limits are large.
   • Some states add more money (“matching contributions”) to these accounts.
   • Each state has a 529 Plan, but you can have a 529 account using another 529 Plan, just remember that sometimes opening these accounts in your state gives additional tax benefits (deductions).

Scenario 1 – Setting aside the money but not investing (without a 529 Plan)

Savings Calculator — inputs: initial deposit $30,000; annual contribution $5,000; interest rate 0%; years to save 10; tax rate 30%.

“Savings Calculator.” Calculator.net, 2024, www.calculator.net/savings-.

In reality, this will be less in 10 years because of inflation.

Scenario 2 – Investing for college in a taxable account (without a 529 plan)

Savings Calculator — inputs: initial deposit $30,000; annual contribution $5,000; interest rate 10%; compound annually; years to save 10; tax rate 30%.

“Savings Calculator.” Calculator.net, 2024, www.calculator.net/savings-calculator.html?cstartingprinciple=30%2C000&.

Result: $47,000 more in 10 years.

Scenario 3 - Investments in a non-taxable 529 College Account

Savings Calculator — inputs: initial deposit $30,000; annual contribution $5,000; interest rate 10%; compound annually; years to save 10; tax rate 0%.

“Savings Calculator.” Calculator.net, 2024, www.calculator.net/savings-.

Result: $30,000 more (compared to taxable account investments) or $77,000 more (compared to no investments) in 10 years.

So if you are going to college, and if you have a 529 Plan, keep in mind that educational expenses are way more than just tuition and housing. Out of this list of things, these ones qualify for educational expenses, not the crossed out ones:

• Tuition and Fees
• Books and Supplies
• Meal Plans
• Student loans
• Transportation
• Medical expenses
• Computers, Internet access
• Health Insurance
• College applications and testing fees
• Extracurricular activities

2. Coverdell ESAs:
   • Also tax-free for education.
   • Can be used for K-12 and college (ESA is “Education Savings Account”).
   • Only those with annual income below a certain amount can use them.
3. Custodial Accounts (UGMA/UTMA):
   • Not tax-free, but up to $1,350 a year generated by account is tax-free (and another $1,350 at a low rate).
   • More flexible use of money.
   • Any parents can open for you, transfer to you at age 18-21.

Be careful, some choices can have consequences without you realizing it. For example:

• Using these accounts might reduce financial aid (if you are going to apply for it).
• How your parents claim you on their taxes can affect education tax credits.
• Using 529 money for non-education expenses can lead to taxes and penalties.

It's best to talk with your parents about these options to avoid surprises.

Having a Credit Card in Your Name

When you have your first credit card, have it opened in your name (with your parents’ permission). This will help you build your record of timely payments (called “credit history”). This will later help you take out a loan at a cheaper rate to buy a car or a house. Also, without credit history, you might not be able to buy a house or apartment in the future at all. Buying a house in the future may be much smarter than renting, because it has tax benefits (since mortgage interests (not full mortgage payments) may be tax deductible if you itemize).

Part C - How to Actually File Tax Forms and Pay Taxes

What Is the Difference between Tax Return and Tax Refund

“Filing” taxes is submitting tax forms to the government. A tax return is a form you fill out and file with the tax authorities (in the U.S. it is the IRS - Internal Revenue Service) to report your income, deductions, and taxes to the government. This is how you inform the tax authorities how much money you earned in a year and how much tax you already paid.

If your employer kept too much of your money for taxes, the government will send you a refund (but only if you file the tax return form). If you haven't paid enough through your employer withholding taxes, you'll need to fill in the tax return form and pay the difference.

Simply put:

• A “tax return” is a form you submit to the government
• A “tax refund” is the money the government gives back to you after you file a tax return, if you overpaid taxes that year.

What Is the Difference between Tax Credit and Tax Deduction

Both tax credits and tax deductions reduce your taxes, so it's important to indicate them on your tax forms.

• Tax credits directly reduce the amount of tax you owe. For example, a $1,000 tax credit reduces your tax amount by $1,000.
• Tax deduction is an amount of your income or gain on which you don’t need to pay taxes. So if your tax rate is 24%, $1,000 reduces your tax amount by $240.

So tax credits are better than deductions (even though they sound like they should be worse).

When to File

The tax filing deadline is typically April 15th of the following year. For example, for income earned in 2025, you'd file by April 15, 2026 (unless it's on a weekend or an official holiday). You can also apply (before April 15) to get an extension.

When to Pay

You pay taxes together with your filing (by April 15 of the next year). But sometimes you indicate on the tax form that you have nothing to pay, or ask for a refund.

If the government considers you self-employed (over $400 a year without an official employer, for example, by babysitting, selling something, being an influencer), the rules are more complicated, more taxes need to be paid (payroll taxes, such as Social Security and Medicare taxes, at a combined rate of 15.3%), and several times a year rather than once (called “estimated taxes”). On the other hand, you also get many more “deductions” from taxes, and you should indicate them on your tax return.

See my Vocabulary at the end for more financial words that you need to know.

Now that you understand the main terms, here is a step-by-step guide to doing your taxes:

1. Determine: do you need to file and who files the tax forms (tax return)

   Teens sometimes have to file their own tax returns, but parents often help with this process. Determine if you need to file - check if your income exceeds any filing threshold:

   • No need to file: if your income is below the thresholds mentioned in the Introduction; OR
   • Need to file your own return, as a teen: Required if your income exceeds the thresholds mentioned in the Introduction; OR
   • Can ask parents to include your income on their return (on special IRS form 8615): possible if your income is only from investments and savings (sale of investments, interest and dividends - no “earned income”), totaling between $1,350 and $13,500. (Some other requirements should also be met that make you “dependent”: you should be either under 19 or a full-time student under 24, and some others).
   • Consider filing even if below the thresholds, to claim potential refunds if you had an official job and your employer kept (withheld) some of your money for your taxes. Also, if you file a tax form, even incorrectly, your penalties will not be large, and the IRS does not inform you of your mistakes within 3-6 years, you will not have penalties. But if you don't file, you can owe huge penalties for many years for very old taxes.
2. Choose a filing method
   • Use tax preparation software (e.g., TurboTax, H&R Block) OR
   • File electronically through IRS Free File (if eligible) OR
   • Use fillable forms on the IRS website and then mail them - use IRS Form 1040 and instructions to it on the IRS website OR
   • Hire a tax expert (called CPA - “certified public accountant”).

   The IRS forms are complicated, and tax experts are expensive. For students, it may be the easiest to use TurboTax. There are also a lot of helpful materials on the IRS website and TurboTax/Intuit website.

3. Gather your forms
   • W-2 forms from official employers (they will give it to you, or you ask them).
   • 1099 forms for one-time (freelance) work, investments, or other income (you need to go to every online account to collect each form: for each online platform where you earned money, each bank account, any Robinhood or other investment account - a separate form for each; for custodial accounts, your parents may need to collect these forms).
   • 1098 forms for education expenses or mortgage interest.
   • Receipts for deductible expenses (it's hard to know what is deductible, so try to research this information on TurboTax).
   • Previous year's tax return for reference (this is especially helpful if you're filing online).

   You gather these forms to be able to file them, each form is gathered from a different place. Keep in mind that all employers, online platforms, banks and other organizations send this information to the IRS too, and then the IRS compares it to what you file - so don't miss anything. Tips, fees for tutoring or babysitting are harder to trace, but technically you still are required to report them.

4. Determine your filing status
   • Normally, indicate “single”.
   • Other filing statuses could be: married filing jointly, married filing separately, head of household, or qualifying widow(er).
   • You should remember to indicate that someone else can claim you as a dependent on your return if applicable.
5. Report your income
   • Enter information from W-2s, 1099s, and other income sources.
6. Claim deductions and credits
   • Standard deduction (it is easier - it’s a fixed amount that is not taxed: $15,750 for 2025 and $16,100 for 2026) or itemized deductions (it’s only if you want to list items that reduce your taxes one by one - it’s only if they are higher than the standard deduction, and it's more complicated).
   • Education credits, child tax credit, earned income credit, etc. (follow TurboTax).
7. Calculate your tax amount
   • Use tax tables or software to determine the amount you owe (called “tax liability”) or will receive as a refund.
8. Review your tax return
   • Double-check all entries for accuracy.
9. File your tax return
   • Submit (best electronically through TurboTax, or through other methods mentioned in point 2 above).
10. Pay any taxes owed or wait for your refund
    • If you owe taxes, pay by the deadline (usually April 15) - by mailing a check or setting up a direct payment system for taxes (ask the bank where you have a bank account); you cannot use a credit card for this.
    • If you're due a refund, choose direct deposit for faster processing (also ask the bank where you have a bank account).
11. File the forms for state taxes too
    • Remember, the above steps were just for the Federal taxes. File for state taxes in a similar way, in places where you lived that year for a long time or earned money.

Glossary (Financial Words You Need to Know)

Basis (tax basis) - your original purchase price or investment.

Brackets (tax brackets) – ranges of how much money you make, which determine the tax rate for you (for example, if you make $50,000, your tax rate is 10% on a part of that amount and 12% on the rest), you can find them on the IRS (Internal Revenue Service) website.

Capital gain - profit from investments (and some other assets that are considered capital assets), usually when you sell for more than your purchase price (tax basis).

Compounding - the process in which you do not use any earnings on your investments or other savings, but let them reinvest back to earn you more.

Coverdell ESA – a special account to save for education, when parents have income below a certain level (Coverdell is a name and ESA is Education Savings Account).

Credit history - your record of timely payments (for example, on credit cards) that will later help you get a loan at a cheaper rate to buy a car or a house.

Credit (tax credit) – amount to indicate in your tax form that directly reduces the amount of tax you owe (it is better than tax deduction). For example, a $1,000 tax credit reduces your tax amount by $1,000.

Custodial Accounts (UGMA/UTMA) – taxable accounts that parents can open for children.

CPA - certified public accountant, an expert who can help you with taxes and even submit your tax forms to the government for you.

Deduction (tax deduction) - a part of the money you make on which you don’t need to pay taxes (it sounds like it should be better than tax credit, but it’s worse than tax credit). So if your tax rate is 24%, $1,000 reduces your tax amount by $240 (not by $1,000 like tax credit).

Dividend – the amount a company in which you have stock pays to you from the company’s profits.

Dependent – as a young person, you are usually a dependent for taxes if you are under 19 or a full-time student under 24, and there are other requirements. Being a dependent means your parents help you, and they need to indicate you as dependent on their tax form to get some tax advantages.

Earned income - the amount you receive for any work, full-time or part-time, official or unofficial (like babysitting), or running your business.

Estimated taxes – tax amounts that you think you will owe, you need to pay them several times a year rather than once (usually if you have a business).

Filing taxes - submitting tax forms (usually Form 1040) to the government.

Form 1099 - a tax form that a company where you had a one-time job, investments or other income that’s not a job gives you (at the beginning of the year, for the prior year), that shows how much they paid you (it’s a similar form to W-2, but they do not keep (withhold) taxes from you).

Form 1040 - this is your “tax return”, the main form you submit to (file with) the IRS, the part of the U.S. government responsible for taxes, you can find it on the IRS or TurboTax website.

Gain (net gain) – the amount by which the sale price of your investment is higher than what you paid.

Income - the amount of money you receive in any calendar year.

Interest – the amount the bank pays for you keeping your money in the bank account (or the amount you receive for owning bonds).

IRS – Internal Revenue Service, part of the U.S. government that is responsible for collecting taxes. Your tax returns (tax forms) need to be filed with (submitted to) the IRS.

Kiddie tax – a tax on children’s “unearned income” (usually money made from investments) at their parents’ (usually higher) tax rate.

Liability (tax liability) - the amount of taxes you will need to pay.

Long-term capital gain – amount received from assets sold after one year after the purchase (taxed lower than short-term capital gain).

Loss – the amount by which the sale price of your investment is lower than what you paid.

Medicare tax - part of the “payroll tax” that your employer sends to the government, used by the government to pay for people’s medical care.

Ordinary income - the money you earn, especially as “earned income” by working (but not by selling your investments).

Payroll taxes – taxes that your official employer pays to the government (it pays 7.65% of your salary itself and takes 7.65% from your salary). Payroll taxes are Social Security and Medicare taxes (see definitions).

Progressive taxation - a system where the more money you earn, the higher percentage of it you pay for taxes.

Rate (tax rate) - percentage of your earnings that you need to pay as taxes (for example, 10% or 37%).

Real estate taxes – you pay these taxes when you own real estate (and you don’t need to worry about them until you own real estate).

Realized (realized capital gains) – the asset has been sold (capital gains are only taxable when they are “realized”).

Refund (tax refund) – the amount of overpaid taxes (for example, that were kept-withheld by your employer) that the government returns to you after you file a tax return form. (Do not confuse “tax refund” and “tax return”).

Return (tax return) - a form you submit to (file with) the IRS (the part of government responsible for taxes) to indicate to them the amount of taxes that you owe or ask them to send back to you as a refund.

Roth IRA – Roth (Roth is just a name) Individual Retirement Account, a special account where your funds grow tax-free.

Sales tax – taxes you pay (often without knowing, but you will see if you look at receipts) when we buy something at a store or a coffee shop.

Social Security tax – part of the “payroll tax” that your employer sends to the government, used by the government for people’s future retirement pensions.

Short-term capital gain – amount received from assets sold within one year after the purchase (taxed higher than long-term capital gains).

Standard deduction - the first $15,750 of earned income, usually not taxed.

Stock – a partial (usually tiny) right of ownership of a company.

Tax - an amount of money that you have to pay to the government so that it can pay for public services such as roads and schools.

Taxable accounts – most common bank or investment accounts where the amounts of growth in them are taxed normally.

Thresholds (tax thresholds) – the minimal levels that change your tax situation (for example, whether you need to submit tax forms and pay taxes that year).

Unearned income - the amount you receive from sources other than work, usually from investments.

Withdraw (withdrawal) - taking money from your bank or investment account. (Do not confuse “withdrawal” and “withholding”).

Withhold (withholding, tax withholding) - the employer keeping some of your salary to send it to the government for you as part of your taxes.

W-2 - a tax form that your employer gives you (at the beginning of the year, for the prior year), that shows how much they paid you and how much they kept (withheld) from your salary.

W-4 - a form you fill in and give to the employer (they will ask you to fill it in); and if you do not expect to need to pay taxes, then by stating “Exempt from withholding”, you will ask them not to keep (not to withhold) money from your salary for taxes.

W-9 - a form you fill in and give to a company where you have a one-time job or other income that is not employment (they will ask you to fill it in).

529 account – an account that uses a 529 Plan, which is an investment program of savings for college (with tax benefits) that helps you save money for education.

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