You're never too young: Tax season is here and your kids may owe money to the IRS.
The IRS doesn’t care how old you are. If you have an income, it requires you to pay taxes, even if your first pimple hasn't appeared or you haven't learned to drive.
Any money from a summer or after-school job or through Roblox, YouTube or a youth trading account should be reported if they hit certain thresholds, the IRS says.
So, while it’s exciting for kids to earn their own money, it can be confusing (though educational) at tax time.
Many questions come to mind: When must your kid file a return, who’s responsible for filing it and what's your child's tax rate? The answers depend on the kind and amount of income your kid earns.
Here’s how it works:
What are the different types of income?
To decide if your dependent kid needs to file an income tax return, first know what kind of income was earned. Here are the types:
Earned: Money you earned for work such as wages, tips, commissions, and any part of a taxable scholarship.
Unearned: Investment income like interest, ordinary dividends, and capital gain distributions.
Gross: Earned plus unearned income before taxes.
How much does a minor have to make to file taxes?
For tax year 2023, your dependent child will have to file a tax return if he or she has:
◾ Earned income above the standard deduction of $13,850 for anyone single and under 65 years old. For example, if your college student had a part-time job during the school year and a full-time summer job and earned $14,000 in total.
◾ More than $1,250 in unearned income (in some instances, parents may add their kid’s unearned income to theirs on their tax return and skip the kid’s filing, but more on that later). For example, if your teenager invested during the year through a youth brokerage account and earned $1,500 in interest, dividends and capital gains.
◾ Gross income greater than the larger of $1,250 or earned income plus $400 (up to $13,450). For example, if your kid received $800 taxable interest income and earned $4,750 from a part-time job (gross income of $4,750 + $800 = $5,500 is larger than earned income of $4,750 + $400 = $5,150)
◾ Net earnings from self-employment of at least $400 because he, she or they will likely owe Social Security and Medicare tax.
Should my kid file a tax return even if they don’t have to?
Yes. Kids may want to file a tax return if federal taxes were withheld from their paychecks to get that refunded. Social Security and Medicare taxes, though, won’t be refunded. But your child may earn credits toward each.
Note: Don't forget the state tax return! "You can get a refund federally, and especially at the state level," said Damien Martin, a certified public accountant in Chicago.
What’s the standard deduction for my child?
For tax year 2023, a child’s standard deduction amount is the greater of $1,250, or the sum of $400 plus the child’s earned income, if you can claim the child as a dependent. Otherwise, the standard deduction for a single filer is $13,850.
What tax forms do children use?
This depends on what kind of income your child has and how you want to report it. 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 to report on Form 1040 and attach the form.
◾ In some instances, parents can use Form 8814 to include their dependent child’s unearned income on their own tax return if certain rules are met. Here's an example of that scenario: the child only had unearned income; their gross income was less than $11,000 and the child was under age 19 (or under age 24 if a full-time student) at the end of the year.
Note: Filing a return doesn't mean the child is no longer a dependent, said Tim O'Saben, director of tax content and government relations at the nonprofit National Association of Tax Professionals. "There are specific tests to determine dependency and filing a return on your own is not one."
When can parents include their child’s income on their tax return?
Only if it’s unearned income and above $1,250, parents can choose to include the child’s unearned income on their tax return and skip filing an additional kid return.
Parents can never claim a child's earned income or self-employment income and other types of income.
Should parents include their child’s income on their tax return?
It may be easier than filing another return, but the IRS warns this could lead to a higher tax rate for your child’s income.
“If your child received qualified dividends or capital gain distributions, you may pay up to $110 more tax if you make this election instead of filing a separate tax return for the child,” the IRS says. “This is because the tax rate on the child's income between $1,100 and $2,200 is 10% if you make this election. However, if you file a separate return for the child, the tax rate may be as low as 0% because of the preferential tax rates for qualified dividends and capital gain distributions.”
The IRS also warns if you didn’t have enough tax withheld or pay enough estimated tax to cover what you owe, you may be subject to a penalty.
Other possible disadvantages, according to H&R Block:
You might have to pay more tax. Adding income to your return could:
◾ Limit your IRA deduction.
◾ Limit your student loan interest deduction.
◾ Limit your tuition and fees deduction.
◾ Reduce amounts of itemized deductions, including medical expenses.
Your adjusted gross income might increase, which:
◾ Could affect your eligibility for certain credits, including the American Opportunity Credit, Lifetime Learning Credit, Earned Income Credit, Child and dependent care credit.
◾ Could lead you to pay the Alternative Minimum Tax or increase the amount of AMT you owe.
You can’t claim deductions on your return that your child would be eligible for if they had filed a separate return.
What tax rates do children pay on their income?
Most of the time, minors don’t earn enough to pay income tax. Usually, they would have to earn more than $13,850 and pay the same marginal tax rate as everyone else or $1,250 in unearned income.
The first $1,250 in unearned income is tax-free, and the next $1,250 is subject to the lowest marginal tax rate for a single filer of 10%. Any additional earnings above $2,500 are taxed at the greater of the child’s or the parents’ tax rate, or the “kiddie tax.”
The kiddie tax was first enacted as part of the Tax Reform Act of 1986 to prevent parents from putting assets into their children’s names and have the income derived from these assets potentially taxed at lower rates.
How much could a tax on a child’s income amount to for the tax collector?
Quite a bit.
In tax year 2020, for example, the IRS said about 466,224 taxpayers attached Form 8615, used to calculate the tax for unearned children’s income for a child tax bill of $1.154 billion. That's up from 415,725 filings and $1.095 billion in taxes in 2018.
Who’s responsible for filing my kid’s tax return?
Generally, a child is responsible for filing their own tax return and for paying any tax, penalties, or interest on that return, the IRS said. However, if a child can’t file their own return for any reason, such as age, then the child's parent, guardian, or other legally responsible person must file for them.
If the child can’t sign the return, a parent or guardian may sign the child’s name followed by the words “By (signature), parent (or guardian) for minor child” and deal with the IRS on any matters linked to the return. If a parent or guardian doesn’t sign the return on behalf of the child, they’re only entitled to pay the tax or provide information concerning the child's return.
Can my child’s tax return get audited?
Anyone’s tax return can be randomly chosen for an audit.
“Sometimes returns are selected based solely on a statistical formula,” the IRS says. “We compare your tax return against "norms" for similar returns.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
This article originally appeared on USA TODAY: Tax season may mean your kids need to file with the IRS. What to know.
