If your child is under 18 years old and they earn income on their savings account, you may need to consider who declares the interest. If they are under 18 and earn income from shares, you may need to lodge a tax return on their behalf. Show
• A child who earns $1,150 or more (tax year 2022) in "unearned income,” such as dividends or interest, needs to file a tax return. • A minor who earns tips or makes more than $400 (tax year 2022) in self-employment income will have to pay Social Security or Medicare taxes, regardless of their total earnings. Youngsters are especially ambitious these days, and even if your kids are young enough to be your dependents, they may have to pay taxes. In some cases, you may be able to include their income on your tax return; in others, they'll have to file their own tax return. Whether this is required depends on both the amount and source of the minor’s income. Earned incomeA minor who may be claimed as a dependent has to file a return once their income exceeds their standard deduction. For tax year 2022 this is the greater of $1,150 or the amount of earned income plus $400 up to the full standard deduction of $12,950. As an example, a 15-year-old who works after school and earns less than $12,950 would owe nothing in taxes. Even so, if an employer withheld taxes from her paycheck, she'll have to file a tax return to obtain a refund. Unearned incomeThe IRS also has a cutoff level for "unearned income," such as dividends or interest. If your child's income is above this year's level, they need to file; below that point, they aren't required to file a tax return. The amount for 2022 is $1,150. If the child has both earned and unearned income, both amounts must be added together to determine if the total income triggers the mandatory filing requirement. The IRS provides a formula for figuring this out in Publication 929.
TurboTax Tip: If your child earns more than $1,150 in unearned income (tax year 2022), you can claim the income on your own return. There are restrictions, and you may pay a higher tax, but it will save your child from having to file a return for unearned income.
Additional requirementsEven if a minor's income is less than the minimum threshold, the IRS sets other conditions that may require a tax return to be filed. A minor must file, for example, if a minor owes Social Security or Medicare taxes on tip income. In addition, a minor with income from self-employment may owe Self-Employment Tax, which means paying both the employee’s and employer's share of Social Security and Medicaid taxes. The income trigger for owing tax for self employment is $400 in 2022. Filing on your child's behalfIf your child is required to file a tax return for unearned income, the IRS gives you the option of claiming the money on your return instead. There are certain restrictions, including a limit to the amount of money involved, and the tax you’ll owe may be greater than if your child filed an individual return. If you qualify, file Form 8814 with your 1040 and the IRS will not require your child to file. Let an expert do your taxes for you, start to finish with TurboTax Live Full Service. Or you can get your taxes done right, with experts by your side with TurboTax Live Assisted. File your own taxes with confidence using TurboTax. Just answer simple questions, and we’ll guide you through filing your taxes with confidence. Whichever way you choose, get your maximum refund guaranteed. As your child moves toward adulthood, you face several milestone decisions that involve, in part, a desire to help your child become more independent and responsible. But one milestone for your child that you may not anticipate—even though it will be part of their growing-up experience—is filing that first income tax return. Most students are not taught how to file taxes in school, even though the Internal Revenue Service (IRS) provides an entire website for educators (titled Understanding Taxes). Reasons vary, from underfunding and a lack of student interest to a general failure of the education system to identify skills students need. Most children have only a vague idea of income taxes, let alone the specific rules they must meet. It becomes your role as a parent to help your child initiate this rite of passage by evaluating tax-filing requirements and/or obtaining guidance from tax professionals. This quick guide for parents covers the basic rules that you should know for determining when your child must (or should) file. It also offers suggestions for helping your child take responsibility for their own tax chores in the future. All figures noted in this article are for the 2022 tax year unless stated otherwise. Key Takeaways
Dependent Child StatusTo qualify as your dependent, your child must:
It's worth noting that, with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, personal exemptions for parents and others with dependents were eliminated. However, several other tax-saving opportunities remain. These include:
When Your Child Must File a Tax ReturnSome people mistakenly believe their child's status as a dependent means they don't have to file taxes. But dependent child status does not excuse your child from filing an income tax return in certain situations. A child who meets any one of these tests must file:
Additional rules apply for children who are blind, who owe Social Security and Medicare taxes on tips not reported to an employer or wages received from an employer who didn't withhold taxes, or who receive wages from churches exempt from employer Social Security and Medicare taxes. If filing a return is required by the first test above and the child has no other income besides unearned income, you can avoid filing a separate tax return for your child by making an election described later in this article. When Your Child Should File a Tax ReturnEven if your child isn't required to file an income tax return, it can still be a good idea to file if:
In the first two cases, the main reason for filing would be to obtain a refund if one is due. The others are income-dependent or based on taking advantage of an opportunity to begin saving for retirement or to begin learning about personal finance. Filing to Recover Taxes WithheldSome employers automatically withhold part of pay for income taxes. By filing Form W-4 in advance, children who do not expect to owe any income tax (and did not owe income tax the previous filing year) can request an exemption. Form 1040EZ, used previously for simple individual taxes, is no longer valid for tax years 2018 and beyond as a result of the Tax Cuts and Jobs Act. Filing to Report Self-Employment IncomeYour child can report income from self-employment using Form 1040 and Schedule C to determine profit (as with Form 1040EZ, Schedule C-EZ is no longer used.) If your child has a net self-employment income of $400 or more—or a lower threshold of $108.28 if your child is employed by a church or religious organization exempt from employer Social Security and Medicare taxes—they must file a tax return. To determine if your child owes self-employment taxes (essentially Social Security and Medicare taxes for those who are self-employed), use Schedule SE. Your child may have to pay self-employment taxes of 15.3%, even if no income tax is owed. Filing to Earn Social Security Work CreditsChildren can begin earning work credits toward future Social Security and Medicare benefits when they earn a sufficient amount of money, file the appropriate tax returns, and pay Federal Insurance Contributions Act (FICA) or self-employment taxes. Your child must earn $1,510 to obtain a single credit (increasing to $1,640 in 2023). They can earn a maximum of four credits per year. If the earnings come from a covered job, your child's employer will automatically take the FICA tax out of their paycheck. If the earnings come from self-employment, your child pays self-employment taxes quarterly or when filing. Filing to Open an Individual Retirement Account (IRA)It might seem a little premature for your child to consider opening an individual retirement account (IRA), but it is perfectly legal if they have earned income. By the way, earned income can come from a job as an employee or through self-employment. If you can afford to, consider matching your child's contributions to that IRA. The total contribution must be no more than the child's total earnings for the year. That lets your child start saving for retirement but keep more of their own earnings. It also teaches them about the idea of matching funds, which they may encounter later if they have a 401(k) at work. It will probably make sense for the child to open a Roth IRA if they qualify and begin to benefit from decades of compound interest before retirement and tax-free withdrawals when they do retire. Filing for Educational PurposesFiling income taxes can teach children how the U.S. tax system works while helping them create sound filing habits for later in life. In some cases, it can also help children start saving money or earning benefits for the future as noted above. Even if your child doesn't qualify for a refund, doesn't make enough to earn a Social Security credit, and doesn't want to open a retirement account, learning how the tax system works is important enough to justify the effort. Helping Your Child File a Tax ReturnWhen it comes to helping your child file their income taxes, you should know the following:
Reporting Your Child's Income on Your Tax ReturnYour child might be allowed to skip filing a separate tax return and include their income on your return, but only if:
Explain to your child the basics of Social Security and Medicare and the benefits of earning credits in these programs. Include your child's unearned income on your tax return by using IRS Form 8814. It's important to note that doing so could result in a higher tax rate for you than if the child filed their own tax return. It all depends on the amount of unearned income your child reports. Teaching Your Child About TaxesWhen your child starts to earn their own money, start talking about taxes right away.
What Is the Child Tax Credit for 2021?The Child Tax Credit for 2021 rose to $3,600 per qualifying dependent for the 2021 tax year, as per the American Rescue Plan. To receive the credit, certain income requirements must be met. Do Minors Have to File Taxes?Minors have to file taxes if their earned income is greater than $12,950 (increasing to $13,850 in 2023). If your child only has unearned income, the threshold is $1,150 (increasing to $1,250 in 2023). If they have both earned and unearned income, it is $1,150 ($1,250 in 2023) or their earned income plus $400—whichever is greater. If the minor is self-employed, they will owe self-employment tax when they reach $400 or above. What Is the Standard Deduction for a Child?If you are a dependent, the standard deduction for 2022 is the greater of $1,150 ($1,250 for 2023) or your earned income plus $400. The amount cannot be higher than the basic standard deduction of your filing status. The Bottom LineAs a parent or guardian, it's up to you to discuss and teach income tax filing to your child. The best way to do this is to start early, be patient, and walk your child through the process carefully. Fully explain as much as you need to but don't feel like you have to address every nook and cranny of tax law. After all, that can be pretty tough, even for experienced taxpayers. Finally, consult a tax professional if you get stuck. |