Does Your Child Have to File a Tax Return This Year?
Whether or not your kids owe taxes depends on the amount and source of their income. Here’s a look at the IRS rules, and how to file.
No one is untouchable when it comes to taxes. The IRS wants to know about every penny you earned above a certain amount — yes, even if mommy and daddy claim you as a dependent on their tax return. And even if only recently you learned how to sign your name in cursive and were allowed to stay up past 10 p.m.
On the topic of who is required to file a tax return, the IRS rules are clear: Age is not a factor. Income is.
IRS rules state that a child must pay taxes if in 2019 their unearned income was more than $1,100, their earned income was more than $12,200, or their gross income (earned plus unearned income) was more than the greater of a) $1,100 or b) their earned income (up to $11,850) plus $350.
Don’t worry, we’ll translate all of that into normal-speak to help your little lovelies stay on the right side of Uncle Sam for the 2019 tax filing season. (Quick reminder: The due date for taxes is April 15, 2020.)
Is allowance and cash for odd jobs taxable?
Let’s start with something short and easy: The list of income the IRS doesn’t tax.
The list includes allowance and bat mitzvah/quinceanera/communion/graduation gifts. And unless little Sally is making bank (as in more than $400) weeding the neighbor’s yard and walking her elderly Shih Tzu, in most cases your child can safely pocket the cash without reporting it.
However — because there’s always a “however” when it comes to taxes — your offspring will earn a seat at the adult table in April if her side business takes off or she strikes pay dirt in her portfolio.
When is a child required to report income to the IRS?
The IRS is interested in learning about two types of income: Earned income (wages paid in exchange for work and, yup, you have to pay taxes on side hustles) and unearned income (money from investments, like interest and dividend payments).
If, as of Dec. 31, 2019, a child made more than $12,200 in earned income or $1,100 in unearned income, they’re on the hook to report to the IRS.
EXAMPLE: If your 16-year-old made $14,000 at her part-time job, she has to file a tax return, even if taxes were withheld from her paycheck. So does your 11-year-old investing whiz kid who doesn’t have a job, but made $1,300 in dividend income in her brokerage account.
Your oldest daughter — who had both a part-time job and earned interest on her savings — will be required to file a return if her gross income (earned plus unearned income) is more than $1,100, or her earned income plus $350 is more than $12,200, whichever number is higher. Here’s how that works in the real world:
EXAMPLE: Let’s say she made $2,750 working odd jobs (earned income) and $200 in taxable interest (unearned income). In this case, she’s not required to file a tax return since each is under the income threshold and, when added together ($2,950), total less than her earned income plus $350 ($3,150). But if she earned $600 in interest (and, as before, made $2,750 in wages). Now she’s required to file because her gross income ($3,350) exceeds her earned income plus $350 ($3,150).
Because math and tax law, thankfully the IRS provides an assist. Use the IRS “Do I Need to File a Tax Return?” interactive tool to see if your child is required to file… and if she’s eligible to receive a refund.
What about scholarships and grants?
For college-aged kids who are still dependents, scholarships and fellowship grants aren’t taxable as long as the money was used for legit school expenses (e.g. tuition, enrollment fees, required books and supplies required for you to get the degree).
But if your child uses the money for “incidentals” — like room and board, travel, optional equipment and study snacks — they are required to report that portion as income. Same if they were required to teach, do research or other work as a condition of the scholarship or grant.
The IRS has another online tax assistant tool to help you figure this out: The pithily-named “Do I Include My Scholarship, Fellowship, or Education Grant as Income on My Tax Return?”
Is income from a hobby taxable?
Short answer: No.
However (again, we hedge because we’re talking about taxes), entrepreneurial youngsters who have set up an unincorporated business may have to pay self-employment taxes on their earnings if they made more than $400. And if it’s going really, really well, she may want to start paying quarterly estimated taxes. Just sayin’.
To be safe, let the IRS help you figure out if your youngsters on the hook by going through the “Do I Have Income Subject to Self-Employment Tax?” questionnaire.
To file or not to file
Just because a child is required to report her income to the IRS doesn’t automatically mean she’ll owe Uncle Sam. Similarly, just because she’s not technically required to file a tax return doesn’t mean that she shouldn’t.
The IRS doesn’t automatically send refunds just because you’re eligible to get one: The only way to get a refund check if you’re owed is to file a return. In situations where a college-age student can claim an education credit (e.g. the American Opportunity Credit), it may be worthwhile to file.
Not all situations require your child to file her own separate return. She may be able to fulfill her tax reporting duties by piggybacking on yours.
You have the option to report her income on your personal tax return if the only type of income your child earned in 2019 was interest, dividends or capital gains distributions (aka unearned income)… and it’s less than $10,500. (We’ll pause here so you can re-read that dense sentence.)
Attach Form 8814 to your 1040 if you want to fold a child’s unearned income into your return. Note that the IRS will tax her income at your rate instead of the child’s (likely lower) tax rate. If that’s not cool — or if including her income bumps you into a higher tax bracket — have her file an individual return.
How to file taxes for a child
The IRS doesn’t kid around when it comes to getting what it’s owed. If little Sally is required to report her income, Uncle Sam accepts no excuse for not turning in her income tax homework. To make sure all goes well…
- Adhere to the adult filing deadline: For young children who can’t file on their own, you (the child’s parent, guardian or another legally responsible person) is responsible for filing on her behalf. You’re also on the hook for any amount she owes and doesn’t pay and the resulting late filing or underpayment penalties. And, lucky you, you’re also the go-to person if the IRS needs to resolve any issues with her return.
- Let the IRS know the child is a dependent: Don’t worry: You can still claim your little taxpayer as a dependent as long as they rely on you for the majority of their financial support, live with you for more than half of the year, and aren’t claimed as a dependent on anyone else’s return. On her own return, she’ll need to check the box that indicates she can be claimed as a dependent on someone else’s tax return.
- File with the custodial parent’s return: This applies to parents who fold the child’s investment income into their tax return. If you’re married and filing jointly, you’ll use that return. If you file separately, the IRS says to include the dependent’s earnings on the return of the parent who has the higher taxable income. If you’re divorced or separated, the custodial parent (whomever the child lived with for the greater part of the year) should include the child on their return.
- Sign the return correctly: Stickers or a big purple crayon “X” don’t count. If she hasn’t perfected her signature, you can sign for her, followed by the words “By [your signature], parent [or guardian] for a minor child.” With older children, let this be an exercise you do together on the road to adulting. Tax software makes it super easy and will double-check your work.
- Be prepared to file it via snail mail: If this is your child’s first dance with the IRS, she may not be permitted to file her return electronically. That’s okay: This is a chance to show her how they did it olden times — by using a printer, stamps and the U.S. postal service.
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