Does My Child Need to File a Tax Return?
If your dependent child has earned income, you may wonder if they need to file a tax return. If they are receiving W-2s in their name, it’s reasonable to think they might. However, it depends on their age, how much they earn, and other factors.
And no, you don’t have to claim your child’s W-2 income on your return, but you could if there is tax owed and their annual gross earnings are less than $13,000.
Your child might also have unearned income from investments, dividends, interest, capital gains, and trust distributions.
The limits differ for earned and unearned income, so today, we’ll break it down into digestible bites.
Who Qualifies as a Dependent for Tax Purposes?
Let’s first drill down on the definition of a dependent child.
To be considered a dependent, the child must either:
· Not yet have turned 19 years old as of December 31st of the tax year
· Be under 24 and in school full-time for at least five months of the year
· Or be permanently disabled at any age
Additionally, they must also:
· Be your child by birth or adoption, foster child, step-child, sibling, half-sibling, or a child of one of the above
· Be living under your roof for more than six months of the year
· Have a social security number
· Not provide more than half of their own support
· Not filing jointly with a spouse
· Not claimed as a dependent on another return
· Be a US citizen, resident, or national, or a resident of Mexico or Canada
What Kind of Income is Subject to Taxation for Kids?
In general, if your dependent child’s income exceeds the standard deduction, they will need to file a return. For 2024, the maximum is $14,600.
However, there are some caveats. If your kid had a summer job where taxes were deducted, it is in their best interests to file as they can get those amounts returned. If their income is less than $14,600 and they don’t file, there are no penalties, but who doesn’t want a few extra bucks in the bank?
In another scenario, suppose your child was self-employed, such as mowing lawns, running a dog-walking or babysitting business. In that case, they would have to pay self-employment taxes equal to the employer’s share of Medicaid and Social Security taxes.
The threshold for triggering self-employment tax is $450 in 2024. Though jobs like these are often considered “under the table,” even if they don’t meet the standard deduction threshold, they will still have to pay.
Once they turn 19, they will need to file their own returns regardless of how much money they earn.
Earned Income for Dependent Children
If your child earned income, was issued a W-2 for 2024, and the amount is less than the standard deduction, they are not obligated to file a return. As stated above, if they had any taxes withheld, it is in their interest to file so they can get that money back.
Earned income exceeding $14,600 must be filed. This includes W-2 income or income reported on a 1099. If the money was earned as an independent contractor, they will need to file as a self-employed person.
Unearned Income for Dependent Children
Investment income is referred to as unearned income. The earning limits are $1300 for 2024. They don’t have to file if the unearned income amounts are less.
Should earnings exceed the threshold, the parent can choose to report the amounts on IRS Form 8814. Doing so will avoid the child having to file on their own behalf.
What if The Child Has Earned and Unearned Income?
A child with both earned and unearned income presents a somewhat more complex tax scenario. If they have earned income and also brought in more than $450 in unearned income, they are obligated to file a return.
How Your Child’s Income Impacts Your Child Tax Credit
Child tax credits are incredibly helpful when raising a child. However, if you are a single parent and your child earns your tax credit may be reduced by the amount of their income. This rule does not apply to married couples.
What About IRS Correspondence?
Parents might be involved in their child’s tax filing for various reasons. If that’s the case, they may also need to handle IRS correspondence and sign forms on their behalf. When you do this, be sure to include wording that indicates you are authorized to do so.
For example, you might sign a document:
“by [your signature], parent of the minor child.”
You may also choose to become officially registered as a third-party designate. To do so, you would need to check the appropriate box in the Third-Party Designee section of the tax return, completing the form with your name or that of the person authorized to liaise with the IRS concerning the return.
When or if you receive IRS correspondence regarding your child’s return, be sure to contact the IRS to let them know the taxpayer is a child, as they won’t automatically know this.
When Should My Kid Start Filing Their Own Taxes?
Outside of the rules and regs we outlined today, your child can start doing their own taxes as soon as they feel they can. Encouraging them to learn the ins and outs of taxation is an excellent way to teach them how the system works and get them started on a path toward financial responsibility.
To recap some of the points we covered:
· Your child is not required to file a return if their earned income is less than the standard deduction.
· You may claim your child’s earnings on your return to avoid them having to file.
· Self-employment income has a very low threshold and is subject to taxation.
· Encourage your child to file if they have W-2 income, as withheld taxes will be returned to them.
· In some cases your child’s income may reduce the amount of your Child Tax Credit.
If you have questions about your child’s tax return, book a call with the experts at TaxSmart today.