If your son or daughter has a summer job, here are some tips for maximizing income and instilling good financial habits:
This may be the first time the worker is faced with a W-4 form. If summer earnings, combined with any other income that is earned during the year, are not enough to incur income tax then he or she should claim exemption from withholding. This avoids having to wait until tax time to reclaim the tax that was withheld unnecessarily.
This is a great time to learn the value of saving. Part of each paycheck should be put into a savings account for the “future.” That could mean money for college, a car or some other goal that is down the road. Learning to have the patience to wait for the prize is important for young people. Saving is as easy as putting an agreed-upon percentage of pay or fixed dollar amount into a savings account each pay period. If possible, set up a direct deposit from the employer to the bank. Otherwise make a bank deposit as soon as the paycheck comes to reinforce the habit of saving first before spending the paycheck.
If total income for the year is going to be more than $8,500, such that your son or daughter may owe income tax, consider making an IRA contribution with some of the earnings. That will lower their tax bill and give them a great start towards retirement. If the worker is not going to have taxable income consider a Roth IRA contribution instead. Although contributions are not tax-deductible, Roth IRAs are an even more powerful retirement tool than traditional IRAs because all of the earnings are tax-free at withdrawal.