Does my child need to file a tax return?
Did your kids discover the joys of entrepreneurship this year, raking in the dough from lemonade stands, shoveling driveways, or walking the neighbors’ dogs? Or maybe generous family members gave them stocks and bonds instead of toys.
Your child may enjoy having some money of their own. But they might also get to experience a little something called paying taxes.
As dependents, your kids face different rules for determining whether they need to file a federal income tax return. However, unlike adult taxpayers, children have some flexibility in choosing how to report their income. But you still need to understand the tax rules for children and dependents.
Tax Filing Requirements for Dependents
Taxpayers usually think of dependents in terms of children, but you can still claim a child as a dependent even after they turn 18 as long as they meet other rules for dependency. As such, these rules apply to any qualifying dependent under age 65 and not blind.
There’s also no lower age limit. If your newborn received a gift of dividend-paying stocks or mutual funds, you might have to start thinking about filing a federal tax return on their behalf sooner than you think.
The first step in helping your children file their taxes is figuring out what they’re eligible for. To do so, you need any W-2s or tax documents detailing their taxable income. Once you have the paperwork in hand, there are several other points to consider.
1. Earned vs. Unearned Income
The IRS has two income categories:
- Earned Income. This category refers to wages, tips, salaries, professional fees, or commissions your child earned from doing actual work.
- Unearned Income. This category covers any other income your child didn’t directly work for, such as investment income, dividends, interest, or capital gains. If a child has a trust fund, distributions count as unearned income unless the child has a disability trust, in which case the IRS considers distributions earned income.
Knowing where your child’s earnings fall is critical to determining whether they must file a tax return.
2. Income Guidelines
Now that you know how the IRS defines a child’s income, you can determine whether yours is obligated to file a return. For the 2021 tax year, your child must file a tax return if any of these situations apply:
- They have only earned income greater than $12,550.
- They have only unearned income greater than $1,100.
- They have both earned and unearned income exceeding the larger of $1,100 or their earned income (up to $12,200) plus $350.
For example, let’s say your child received $5,750 from a summer job and $200 of dividend income from investments. In that case, your child would not have to file a tax return because their earned income of $5,750 is less than $12,550, and their gross income of $5,950 ($5,750 plus $200) is less than their earned income plus $350.
Likewise, if your child received $300 from babysitting and $200 of dividend income, they would not have to file a tax return because $300 plus $200 is $500, which is less than $1,100.
In other words, if your child only makes money from working, the bar for being taxed is quite a bit higher than it would be if all they did were cash dividend checks.
3. When Filing Is Worth It
Just because children don’t have to file tax returns doesn’t mean it wouldn’t be beneficial for them to do so. If your child has a job that withholds federal income taxes, they may be able to get at least some of that money back by filing a tax return.
Your child may also benefit from filing a return if they qualify for a refundable tax credit, such as the earned income tax credit or the American opportunity tax credit. Remember, if they don’t file a tax return, they can’t get a refund.
4. Special Circumstances
There are a few special circumstances in which children must become tax filers even if they don’t have a lot of income. These are the most common scenarios:
- They owe Social Security or Medicare taxes on tips not reported to their employer on wages received from an employer that didn’t withhold those taxes.
- They owe additional tax on nonqualified withdrawals from a health savings account or early withdrawals from a retirement account.
- They earned $108.28 or more in wages from a church or other religious organization that doesn’t withhold Social Security or Medicare.
- They earned $400 or more in profit from self-employment.
Standard Deduction for Dependents
If you’ve crunched the numbers and determined it would be in your child’s best interest to file a tax return, the next step is figuring out how much they can claim for a standard deduction.
When you file a tax return, you get to choose between claiming the standard deduction or itemizing deductions, whichever method gives you a better tax benefit. Your child will likely claim the standard deduction since most kids don’t have common itemized deductions, such as home mortgage interest, state and local taxes, and charitable deductions.
The standard deduction available to a dependent is the larger of:
- The child’s earned income plus $350 (not to exceed the regular standard deduction amount, which is $12,550 for 2021)
The size of these deductions means that most children won’t have to pay taxes. If your child had federal income taxes withheld and earned less than the regular standard deduction amount, they’d get it all back.
Who Can File the Return?
Interestingly, no official age guidelines define who can sign and file a tax return. If your child can understand the instructions and fill out the return, then you can have them prepare and sign their own return. They’ll file using the same Form 1040 you use to file your return, so you should be able to assist them. It can be an excellent opportunity to teach your child about money management and the process of filing taxes.
Just remember that your child is responsible for any penalties that might occur as a result of a return they fill out. This legal liability could become a problem if the IRS finds issues with the return. The IRS can even refuse to divulge information or discuss any issues with you if your name is not signed or noted as a third-party designee on the form.
Fortunately, if your child is too young to handle this kind of responsibility, a parent or guardian can complete and sign the form for them. Simply sign your child’s name, then add “By [your name], parent [or guardian] for the minor child.”
Issues & Audits
Would the IRS really audit a child? Yes, but don’t worry that your newborn will be hauled into court. If a parent or guardian signs the return, the parent or guardian is allowed to deal with the IRS if any issues come up or if the child’s tax return is audited.
But if your child signs their return, it can get a little tricky. Parents can provide the IRS with information in this situation, but they can’t do anything else unless the child wrote them in as a third-party designee who has permission to discuss the return with the IRS.
But this designation doesn’t allow parents to receive their child’s refund or agree to any further tax liability. It’s just a safe way for parents to remain involved while still respecting the child’s freedom to file on their own.
If your child didn’t name you as a third-party designee on the return, you can still get the IRS to communicate with you. Have your child sign Form 2848 (a power of attorney) and submit it to the IRS.
That said, if you receive a notice from the IRS about your child’s tax return, you should immediately contact the IRS to disclose that the return belongs to a minor child. The IRS will let you know how to proceed.
Reporting a Child’s Unearned Income on Your Return
If your child received $11,000 or less in interest and dividends during the tax year, you can elect to report their income on your tax return rather than having them file their own tax return. That can save time and money for families in which children own investments that generate income.
To make this election, report the child’s income on Form 8814 and include it with your Form 1040. However, there are limitations on when you can use this method.
- This election only applies if your child has unearned income. You can’t report their earned income on your return.
- Your child must be a) 19 or younger or b) 24 or younger and a full-time student.
There’s one other potential pitfall to be aware of if your children have unearned income. The “Kiddie Tax” is a rule designed to prevent parents from avoiding taxes by shifting income-producing investments to their children, who might otherwise pay a lower tax rate than their parents.
Under the Kiddie Tax, a child pays taxes at their normal income tax bracket up to a certain threshold. For 2021, that threshold is the child’s earned income plus $2,200 of unearned income.
The child pays taxes at the parents’ tax rate on any unearned income over that amount (assuming the parents’ tax rate is higher than the child’s tax rate). If the parents are married but don’t file a joint return, the child pays taxes on income at the same rate as the parent with the greatest taxable income. If the parents are unmarried, the child’s tax rate is the same as the custodial parent’s rate.
The Kiddie Tax applies if the child meets all the following requirements during the tax year:
- Your child’s tax filing status isn’t married filing jointly.
- Either of the child’s parents is alive at the end of the year.
- The child’s unearned income for the year is greater than the tax filing threshold of $2,200.
- The child is a) under age 19 at the end of the tax year, or b) a full-time student under age 24 who does not provide more than half of their own support.
If your child meets all these requirements, they — or you if you’re reporting their income on your return — must file Form 8615 with their other tax forms.
Filing taxes is an important milestone for children. If yours are old enough to learn and understand the process, involve them and start them off on the right foot toward becoming responsible taxpaying citizens.
Today, the promise of a tax refund might be your child’s primary motivation for filing a tax return. But they’ll be sure to appreciate an early introduction to the complex process of complying with tax law later in life.
If you need help filing your own return or a separate return for your child, use reputable tax software or reach out to a certified public accountant or tax professional.
Pro Tip: If you’re unsure if your child needs to file a tax return, talk to a qualified tax preparer at a company like H&R Block. They’re available to answer all your tax questions.