If you’re under age 18 and working for a company that gives you a W2, then the IRS probably owes you some money. Over the course of the tax year, your employer usually sets aside a portion of your paycheck for taxes. Even though you’ve technically earned the money, you never see it as your company sends it off the the IRS at the end of the year. This is called tax withholding.
The Investopedia definition of withholding is as follows:
A withholding is the portion of an employee’s wages that is not included in his or her paycheck, but is instead remitted directly to the federal, state or local tax authorities. Withholding reduces the amount of tax employees must pay when they submit their annual tax returns. Investopedia.com
Withholding taxes can simplify filing IRS returns and make the process much easier… if used correctly. Withhold to little, and you’ll be liable to make up the difference at the end of the year. Withhold to much, and you (can) get a refund.
However, if you’re on the journey to Millionaire by 25, there’s a good chance that you don’t need to pay taxes, which means that the government owes you your withholdings (which could end up being a few hundred dollars).
Here’s how to get them
To get your withholdings refunded, you will need to file a tax return. Even if you don’t owe taxes, it’s important to file returns for refunds, experience and precedent. I’ve created a guide on filing taxes as a minor here. By filing the return, the IRS sees that you have no tax liability, and send you the withheld taxes back to you via check or direct deposit.
With online filing, you can get your refund in as little as 8 days from submission (if you elect for direct deposit.)
To check on your refund status, use the IRS tool Get Refund Status.
If you didn’t claim a refund for previous years by not filing a return (this assumes you had no tax liability), you may be able to get the unclaimed refunds back this year too.
💡 Did you know? The IRS Has More Than $1.1 Billion In Unclaimed Tax Refunds.
You have three years from the date of the original deadline of a tax return to claim your refund. That means that in 2019, you can get tax returns from 2016 and 2017 in addition to the year of 2018. This could be significant if you earned alot within the past three years.
Simplify the process, and get rid of tax witholdings.
If you know that you’re going to make under the child tax limit for earned income (read more about taxes for 2019 here), then you can request your employer to not withhold any taxes. You need to meet two certain conditions to request this (but if you’re a minor, then you probably meet them).
• For 2018 you had a right to a refund of all federal income tax withheld because you had no tax liability, and
• For 2019 you expect a refund of all federal income tax withheld because you expect to have no tax liability. (This means that as a minor, you must earn less than $12,000 [for 2019]).
If you meet these two conditions, file a W4 with your employer, and request that they do not withhold any of your 2019 taxes.
What should you do with this “newfound” money?
Don’t spend it. I see many adults immediately spending their refunded withholdings, which is not financially responsible. In their case, that money is part of their wages – it doesn’t come from thin air. Treat it like you worked for it, because you did. In your case, without reading this post, you wouldn’t even know that this money exists. Say you’re able to get a return of $400. If you don’t spend, but invest the cash, you could end up with much more then the initial investment.
For example, if you invested it in an aggressive growth mutual fund that returned an average of 10%, and kept that $400 return invested for 50 years, you’d walk away with $46,958.61, doing nothing but watching your cash grow.