Does your son or daughter work during the summer or school year? A part-time job can be a great way for your child to learn about financial responsibility. It can also teach a valuable lesson about owing taxes. In addition to explaining why the government takes money from kids' paychecks, parents may need to help their children file their taxes by April 15.
Here are answers to common questions about the tax rules that may apply to kids.
Does My Child Need to File a Tax Return?
For 2019, your dependent child must file a federal income tax return in the following situations:
- The child has unearned income of more than $1,100. If your child has more than $2,200 of unearned income, he or she may be subject to the so-called "kiddie tax."
- The child's gross income exceeds the greater of 1) $1,100, or 2) earned income up to $11,850 plus $350.
- The child's earned income exceeds $12,200.
- The child owes other taxes, such as the self-employment tax or the alternative minimum tax (AMT).
Even if your child isn't required to file a tax return, one should be filed if federal income tax was withheld for any reason and would be refunded if a return is filed. It's also necessary to take advantage of certain beneficial tax elections, such as the election to currently report accrued U.S. Savings Bond income that would be sheltered by your child's standard deduction.
Who's Responsible for Filing My Child's Return?
A child is generally responsible for filing his or her own tax return and for paying any tax, penalties and interest. If a child can't file his or her own return for any reason, the child's parent, guardian or other legally responsible person must file it on the child's behalf.
If the child can't sign the return, a parent or guardian must sign the child's name followed by the words "By (signature), parent or guardian for minor child." If you sign a child's tax return, you can deal with the IRS on all matters related to the return.
In general, a parent or guardian who doesn't sign can only provide information concerning the return and pay the child's tax bill. The parent or guardian isn't entitled to receive information from the IRS and can't legally bind the child to a tax liability arising from the return.
Child-Related Tax Breaks
It can be expensive to raise a child. Fortunately, parents may be eligible for several child-related federal income tax breaks, including:
Child credit. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) increases the maximum child credit from $1,000 to $2,000 per qualifying child. The hitch? Only kids under age 17 qualify.
Up to $1,400 of this credit can be refundable, meaning you can collect it even if you don't owe any federal income tax. Under the TCJA, the income levels at which the child credit is phased out have significantly increased, so many more families now qualify for it.
Tax credit for over-age-16 dependents. For 2018 through 2025, the TCJA establishes a new $500 tax credit that can be claimed for a dependent child who isn't under age 17.
The term "dependent" means you pay over half the child's support. However, a child in this category also must pass an income test to be classified as your dependent for purposes of the $500 credit. For 2019, your over-age-16 dependent child passes the income test if his or her gross income doesn't exceed $4,200.
Higher education tax credits. Paying college costs could qualify parents for one of two federal tax credits. First, the American Opportunity credit can be worth up to $2,500 during the first four years of a child's college education. Second, the Lifetime Learning credit can be worth up to $2,000 annually, and it can cover just about any higher education tuition costs.
Both higher education credits are phased out at higher income levels. But the Lifetime Learning credit is phased out at much lower income levels than the American Opportunity credit. Also, you can't claim both credits for the same student in the same year.
Deduction for student loan interest. This deduction can be up to $2,500 for qualified student loan interest expense paid by a parent. However, for 2019, the deduction begins to phase out when modified adjusted gross income is above $70,000 for single taxpayers and $140,000 for married couples filing jointly.
In addition to these tax breaks, single parents may be able to file their taxes using head of household (HOH) filing status. This is preferable to single filing status, because the tax brackets are wider and the standard exemption is bigger (if you don't itemize deductions). HOH status is available if:
For a given tax year, parents can choose to report their children's income on their tax return if:
- The child will be under age 19 (or under age 24 if a full-time student) as of December 31, and
- All of the child's income is from interest and dividends, including mutual fund capital gains distributions and Alaska Permanent Fund dividends.
So, kids with income from working part-time jobs don't qualify. Your tax professional can tell you if this option is allowable and advisable in your specific family situation.
What's the Kiddie Tax?
For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) revamped the kiddie tax rules. Under the TCJA, a portion of the kid's (or young adult's) unearned income is taxed at the higher rates paid by trusts and estates. Those rates can be as high as 37% and as high as 20% for long-term capital gains and dividends.
Under prior law, the kiddie tax rate equaled the parent's marginal rate. For 2017, a parent's marginal rate could have been as high as 39.6% or 20% for long-term capital gains and dividends.
Follow these steps to calculate your child's taxable income:
- Add the child's net earned income and net unearned income.
- Subtract the child's standard deduction.
The portion of taxable income that consists of net earned income is taxed at the regular rates for a single taxpayer. The portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold ($2,200 for 2019) is subject to the kiddie tax. This amount is taxed at the higher rates that apply to trusts and estates.
Unearned income for purposes of the kiddie tax means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services. Some examples of unearned income are capital gains, dividends and interest. Earned income from a job or self-employment is never subject to the kiddie tax.
Important: For a given tax year, any child (or young adult) who meets the following conditions must file Form 8615, "Tax for Certain Children Who Have Unearned Income":
- The child has more than $2,200 of unearned income (for 2019).
- He or she is required to file Form 1040.
- He or she is 1) under age 18 as of December 31, 2) age 18 as of December 31 and didn't have earned income in excess of half of his or her support, or 3) between ages 19 and 23 as of December 31 and a full-time student and didn't have earned income in excess of half of his or her support.
- He or she has at least one living parent as of December 31.
- He or she doesn't file a joint return for the year.
Where Can I Find More Information?
The rules for kids can be complicated in certain situations, especially when the kiddie tax comes into play. Contact your tax advisor if you have additional questions about the tax consequences of working a part-time job or reporting unearned income from investments, as well as potential tax-saving opportunities that come with parenthood.