Taxes and Your Children
Over the years we have encountered questions on whether client’s children need to file their own taxes.
Separate return for my child?
Your child must file their own return if one of the following conditions is met:
- Earned Income: He/she has earned income of more than $6,300. Earned income applies to wages, salaries received as a result of providing services to an employer, even if only through a part-time job.
- Unearned Income: He/she has investment income that exceeds $1,050. If the child’s unearned income exceeds the threshold and only consists of interest and dividends, then you can elect to include it on your own return and combine it with your income. Do this by completing IRS Form 8814 and attaching it to your personal tax return. Remember, if you established a custodial account for your child such as a UGMA or UTMA account, the investment earnings in this account is taxable to the child.
- Combined Income: His/her earned and unearned income together total more than the larger of $1,050, or total earned income (up to $5,950) plus $350.
- Estimated payments: If there are prior-year estimated tax overpayments applied to the child’s current year return or if there is estimated tax or withholding tax paid in the child’s name.
- Exceptions: Some thresholds are different depending on whether your dependent child is married, blind, or over age 65.
You may have heard of the infamous kiddie tax. This has to do with your child’s unearned income. If he/she has unearned less than $1,050, there is no tax. If this income is between $1,050 and $2,100, it is taxed at the child’s rate. Anything above $2,100 is taxed at the parent’s highest income tax rate.
The responsibility for filing your child’s tax return rests with your child if he/she is capable of doing so. If they are not old enough to understand how to prepare a return, then it becomes the parent or guardian’s responsibility to file it or to include the child’s income on their own return.
Tax Planning Opportunity
If your child does have earned income, take advantage of it by funding a Roth IRA for them. The Roth IRA will grow tax-free indefinitely over your child’s life - which can be a very valuable asset!