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How To File Your Child's First Income Tax Return

Rich White

A Quick Parental Guide to Taxes
Let's begin by describing three basic reasons why children should file federal income tax returns:

  • Filing is required by the Internal Revenue Service (IRS), based on the child's income.
  • Filing can help to recover taxes that have been withheld by your child's employer.
  • Filing helps to educate children and establish good financial habits that will continue into adulthood.

When Children Must File
Children can be claimed as dependents provided that they meet one of the following categories:

  • Under age 19 at the end of the year
  • Under age 24 at the end of the year and a full-time student
  • Permanently disabled at any age

To claim an exemption for a dependent child, the taxpayer must provide at least 50% of the child's support and the child must live with the adult at least half of the year. Parents, step-parents, foster parents, siblings and grandparents may claim children as dependents.

For a qualifying dependent child, there are four basic tests, any one of which requires a federal income tax return to be filed for a given year:

  1. The child has unearned income (from investment interest, gains, and so on) above $950.
  2. The child has earned income above $5,800.
  3. Gross income is greater than the larger of $950 or earned income (up to $5,800) plus $300.
  4. Net earnings from self-employment are $400 or more.

In each case, amounts shown are for 2011. For more details, see IRS Publication 929: Tax Rules for Children and Dependents.

Additional rules apply for children who are blind, who owe Social Security and Medicare taxes on tips or wages not reported to or withheld by the employer, or those who receive wages from churches exempt from employer Social Security and Medicare taxes. Consult a qualified tax professional for details.

If filing is required by the first test above and the child has no other income except unearned income, parents can avoid a separate filing for the child by making an election described later in this article.

Johnny is 17 years old and is claimed as a dependent on his parents' tax return. He earned $100 in interest income from a bank account in his name (unearned), $1,500 working part-time in a gas station (earned), and $200 mowing lawns (self-employment). He does not have to file because he doesn't meet any of the four tests.

Example - When to File

Many states have filing requirements for children that parallel federal rules, but you should check with a qualified tax advisor for details regarding your state's filing rules.

When Filing Can Recover Taxes Withheld
When children take jobs that pay taxable wages, some employers may automatically withhold part of pay for income taxes. By filing Form W-4 in advance of withholding, children who do not expect to owe any income tax can request that employers not withhold. But if the employer has already withheld taxes, the child should file a return to get the taxes back from the IRS.

The simplest way to file is to use the one-page IRS Form 1040EZ, which can be found on the IRS website. The child must sign the form, attach a copy of any Form W-2 provided by the employer, and the IRS will process the refund. Even if the amounts withheld are small, parents should sit down with the child and file the Form 1040 EZ to request a refund. It is quick, simple and most importantly, it teaches the child that every tax dollar counts.

When Filing Is Educational
Filing income taxes can teach children how the U.S. tax system works while helping them create sound filing habits early in life. In some cases, it also can help children start saving money or earning benefits for the future.

In the example above, Johnny earned money from mowing lawns, a form of self-employment. While this type of work usually involves cash payments and Johnny is not required to file a tax return unless net profit from self-employment is $400 or more, it might be a good idea to report self-employment income, for two reasons:

  • Earning Social Security work credits - Children can begin earnings work credits toward future Social Security and Medicare benefits when they earn a sufficient amount of money, file the appropriate tax returns, and pay FICA or self-employment tax.

What Parents Should Understand
When it comes to filing their children's income taxes, parents need to know the following:

  • Legally, children bear primary responsibility for filing and signing their own income tax returns. This responsibility can begin at any age, perhaps well before children become eligible to vote. According to IRS Publication 929, "If a child cannot file his or her own return for any reason, such as age, the child's parent or guardian is responsible for filing a return on his or her behalf."

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