Did you know that the IRS treats everyone equally when it comes to taxes, regardless of age? So, if your child is making some cash from their summer gig, crushing it on Roblox, gaining traction on YouTube, or even exploring the stock market with a youth trading account, it’s crucial to keep the taxman informed if they cross certain income thresholds.
It might sound a bit overwhelming at first, but think of it as a crash course in adulting! There are some key questions to tackle when tax season rolls around, and the answers depend on the type and amount of income. But don’t fret, we’re here to help navigate this educational (though sometimes puzzling) journey together!
When does a child need to file a return?
For the tax year 2023, your dependent child will need to file a tax return if they:
1 - Have earned income above the standard deduction of $13,850. For instance, if your college-goer had a part-time job during the semester and a full-time summer job, earning a total of $14,000.
2 - Accrue more than $1,250 in unearned income. For example, if your teen invested through a youth brokerage account and earned $1,500 in interest, dividends, and capital gains.
3 - Earn net earnings from self-employment of at least $400, as they’ll likely owe Social Security and Medicare tax.
Should your child file a tax return even if it’s not mandatory?
Absolutely! They might want to file to get back any federal income taxes withheld from their paychecks as a refund. However, keep in mind that Social Security and Medicare taxes won’t be refunded, but your child may earn credits toward each.
For the tax year 2023, a child’s standard deduction amount is either $1,250 OR $400 + the child’s earned income if you can claim them as a dependent. Otherwise, the standard deduction for a single filer is $13,850. Filing a return doesn’t affect the child's dependency status; specific tests determine dependency, and filing a return independently isn’t one of them.
If children have any earned income and must file a return, they use Form 1040 like everyone else. If it’s only unearned income, kids can use Form 8615 to determine the tax and attach it to Form 1040. In some cases, parents can include their dependent child’s unearned income on their own tax return using Form 8814 if specific criteria are met.
Remember, not filing another return for your child might be simpler, but be aware it could lead to a higher tax rate for your income. Adding your child’s income to your return could also affect your deductions and credits, as well as your adjusted gross income, potentially impacting eligibility for certain benefits or leading to the Alternative Minimum Tax.
What tax rates do children pay on their income?
As for tax rates, most minors don’t earn enough to owe income tax. The first $1,250 in unearned income is typically tax-free, with the next $1,250 subject to the lowest marginal tax rate of 10%. Additional earnings above $2,500 may be taxed at the child’s or parents’ tax rate, known as the “kiddie tax.”
Who’s responsible for filing my kid’s tax return?
When it comes to filing, children are generally responsible for their own returns and any associated tax obligations. However, if they're unable to file, their parent, guardian, or another legally responsible person must do so on their behalf.
If your child can't sign the return, a parent or guardian can sign on their behalf, followed by the words “By (signature), parent (or guardian) for minor child,” and handle IRS matters related to the return. If a parent or guardian doesn’t sign, they’re only authorized to pay the tax or provide information regarding the child's return.
It is exciting to see your child grow up but navigating taxes for your child's income can seem daunting. Understanding tax rates for minors, responsibilities for filing, and potential implications on deductions and credits is crucial.