Just like adults, working teens who paid more taxes than they needed to in 2021 may be entitled to a tax refund. Whether your teen is expecting money back from the IRS or facing a tax bill they will need to pay, it helps for to have their own bank account for direct deposit — or direct debit — of the funds.
The IRS has urged taxpayers to sign up for direct deposit of their tax refund in order to expedite their payment. Setting up direct deposit of their tax refund enables your teen to divide the money into as many as three different accounts, including an account for investments in U.S. savings bonds. Just like an adult, your teen may want to set some of the money aside for savings and splurge on something they’ve wanted with a portion of their tax refund. If your teen has an Individual Retirement Account, they can have all or some of their money deposited into that IRA account.
It’s especially important for your teen to set up their own bank account if they are expecting a refund, because, according to the IRS, you cannot direct your refund into someone else’s checking or savings account, including a parent or guardian. That means if your teenager doesn’t have a bank account or another means to accept the money, they could be stuck waiting for a paper check from the IRS.
The IRS noted that funds may also be directed deposited on or into:
- Some prepaid debit cards (as long as the card has a routing and account number)
- Some mobile apps, including the Cash App
However, setting your teenager up with a bank account in anticipation of a tax refund offers the most flexibility to split payments between checking and savings, or withdrawing the cash to spend.
As the IRS noted in a news release on January 22, 2022, filing electronically and using direct deposit is the fastest, easiest and most secure way for anyone to get their tax refund. Currently, 80% of all taxpayers use direct deposit for their federal tax refunds.
While your teen does not absolutely need a bank account if they are getting a tax refund, it’s a good idea to help get them started on the path to responsible financial management.
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