Most of the time, children are considered to be an extension of their parents when it comes to legal application until the age of majority.\u00a0 Therefore, many taxpayers are surprised to learn their child is a separate taxpayer, even as a minor.\u00a0 If your child has enough income, he or she has an obligation to file a return and pay the tax.\u00a0 In some cases, you may include their income on your tax return; in others, they’ll have to file their own tax return, or you will have to file a separate return on their behalf.\u00a0 Whether this is required depends on both the amount and source of the minor’s income.<\/p>\n
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The first thing to look at is their earned income.\u00a0 Earned income is defined in general as taxable employee pay, long term disability benefits, and self-employment net income, as well as other less common sources.\u00a0 A minor who may be claimed as a dependent must file a return once their income exceeds their standard deduction.\u00a0 Starting in 2018, the standard deduction for a dependent child is total earned income plus $350, up to a maximum of $12,000.\u00a0 Thus, a child can earn up to $12,000 without paying income tax.\u00a0 The second thing reviewed is the unearned income.\u00a0 While there are several items that fall in this category, the most common to minor children are interest and dividends.\u00a0 If your child’s income is above this year’s level, he or she must file; below that point, he or she isn’t required to file a tax return.\u00a0 If the child has both earned and unearned income, both amounts must be added together to determine if the total income triggers the mandatory filing requirement.\u00a0 If your child\u2019s income is below the minimum threshold but owes Social Security or Medicare taxes on his or her coffee hour tips, a return must be filed.\u00a0 Additionally, even if your child does not meet any of the filing requirements discussed, he or she should file a tax return if (1) income tax was withheld from his or her income, or (2) he or she qualifies for the earned income credit, and\/or any additional credits.\u00a0 See the tax return instructions and talk to your CPA\u00a0 to find out who qualifies for these credits.\u00a0 By filing a return, your child may get a refund.<\/p>\n
Prior to 2018, if your child needed to file a return based solely on unearned income, the IRS allowed for you to claim the income on your return given certain restrictions, and the income was taxed at the parents\u2019 rate.\u00a0 This is known as the \u201ckiddie tax\u201d and prevented parents from transferring income producing assets to their children to pay lower tax rates.\u00a0 However, the Tax Cuts and Jobs Act of 2017 greatly modified this alternative for tax years 2018 through 2025 by changing the rates for the kiddie tax by using the estate and trust tax brackets.\u00a0 These are taxed at the highest rate of thirty-seven percent for 2018, which, as an example,\u00a0 is not reached by a married filing joint couple until their income tops $600,000.\u00a0 If you determine to claim the child\u2019s income on your own return, you will report this income on Form 8814 and attach it to your return.\u00a0 If you make this election, you still get the benefit of the child\u2019s standard deduction.<\/p>\n
Some benefits that might be claimed on a child\u2019s separate income tax return are not available if you report the child\u2019s income on your tax return.\u00a0 For example –\u00a0 your child forfeits interest from making an early withdrawal from a savings account,\u00a0 itemized deductions, including state income tax and charitable contributions that add up to tax savings from those itemized deductions would potentially be available,\u00a0 and if your child is blind, a larger standard deduction is available on a separate tax return.\u00a0 In addition, the tax on the child\u2019s income may be somewhat higher if the child received capital gains distributions.\u00a0 You get the benefit of the capital gains rate on any portion of the child\u2019s income taxed at your rate but lose the benefit on any portion taxed at the child\u2019s rate.<\/p>\n
Ultimately,\u00a0 the responsibility for filing your child\u2019s tax return rests with your child if he or she is capable of doing so. If he or she is not old enough to understand how to prepare a tax return, then it becomes your responsibility to file it for them, or to include their income on your return.\u00a0 Your child doesn\u2019t have to be of legal age to sign an income tax return.\u00a0 Any child old enough to sign his or her name can do this.\u00a0 There\u2019s a catch, though –\u00a0 If you sign the return and the IRS ends up having questions, they can deal directly with you.\u00a0 If your child signs the return, there will be limits on what they can discuss with you and what actions you can take to resolve any issues, unless you have a valid power of attorney to act on your child\u2019s behalf.\u00a0 There is a middle ground.\u00a0 Your child can sign the return but show you as the \u201cthird party designee\u201d using a space provided for this purpose near the signature line of the return.\u00a0 That gives you limited authority to deal with the IRS on the tax return without a power of attorney.<\/p>\n
Paying the tax (and interest and penalties, if applicable) is the child\u2019s obligation.\u00a0 You can pay for the income tax from your own money, but in general the IRS considers this a gift to your child.\u00a0 So long as your child remains a dependent, there will be tax implications for you.\u00a0 Many families review various tax return preparations and results to determine which filing combination will result in the best tax benefits for everyone.\u00a0 Always consult a tax professional if your situation is complex.<\/p>\n","protected":false},"excerpt":{"rendered":"
Most of the time, children are considered to be an extension of their parents when it comes to legal application until the age of majority.\u00a0 Therefore, many taxpayers are surprised to learn their child is a separate taxpayer, even as a minor.\u00a0 If your child has enough income, he or she has an obligation to […]<\/p>\n","protected":false},"author":6,"featured_media":929,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"yoast_head":"\n