In order to help your child become more independent and responsible as he or she approaches adulthood, you must make several milestone decisions. You may not anticipate that you will have to file your child’s first income tax return, but it will be an important part of their growing-up experience.
In spite of the IRS’s extensive website for educators (titled Understanding Taxes), most students aren’t taught how to file taxes in school. There are a variety of reasons for this, from a lack of funding and a lack of student interest to a general failure by the education system to identify skills students need.
The parents have a responsibility to educate their children about income taxes, including the specific rules they must follow. It is your responsibility to assist your children with this rite of passage by evaluating tax-filing requirements and/or obtaining professional tax advice.
You should be aware of the basic rules for determining when your child is required to (or should not) file in this quick guide for parents. Unless otherwise noted, all figures in this article are for the 2022 tax year. It also offers suggestions for helping your child become more responsible for their own tax chores.
What You Need To Know
- In general, income tax filing is not taught in school, so parents should teach their children when and how to file.
- Income earned or unearned by dependents must be reported under certain circumstances.
- It is also possible to file because you owe taxes, want to recover withheld taxes, earn Social Security credits, qualify for an earned income credit, or open a retirement account.
- Certain situations, such as having only unearned income (interest, dividends, and capital gains), may allow your child to omit filing a separate tax return and include their income on yours.
- You can still save on taxes even though the Tax Cuts and Jobs Act eliminated certain personal exemptions.
Status of dependent children
Your child must meet the following requirements to qualify as your dependent:
- An active Social Security number (SSN)
- If married, do not file a joint return
- The child must be a son or daughter of the taxpayer, an adopted child, a stepchild, a foster child, a sibling, a half-sibling, a step-sibling, or an offspring of one of these.
- Under the age of 19, or under 24, if a full-time student, or under any age if permanently and totally disabled
- Spend more than half the year with you in the U.S.
Parents, grandparents, and other individuals with dependents no longer have personal exemptions thanks to the Tax Cuts and Jobs Act (TCJA) of 2017.
It is still possible to save taxes in several other ways. These include:
- Status of the head of household in filings
- Child tax credits
- Children and dependents’ tax credit
- Credit for earned income
- Credits for lifetime learning and the American opportunity tax credit
- Interest deductions for student loans
- Deduction for medical expenses
Filing Your Child’s First Income Tax Return
There are situations in which your child must file an income tax return regardless of their dependent status. These situations include:
- A child with only unearned income (for example, interest or gains from investments) over $1,150 ($1,250 in 2023) would be eligible.
- Over $12,950 ($13,850 in 2023) in earned income
- The child must file if his or her gross income (earned and unearned) exceeds either $12,950 ($13,850 in 2023) or their earned income plus $400, whichever is less. The minimum gross income threshold for dependent children is $1,150 ($1,250 in 2023), although there is a minimum of $400 in unearned income plus $400 in earned income.
- Self-employment earnings of at least $40045 are earned by the child
If a child is blind, owes Social Security or Medicare taxes on tips that are not reported to an employer, or is paid by an employer that does not withhold taxes, or is paid by a church that does not withhold taxes, additional rules apply.
You can avoid filing a separate tax return for your child if the child has no other income apart from unearned income, as described in the next part of this article.
What is the right time for your child to file their tax return?
File a tax return even if your child is not required to do so if:
- Earnings were withheld for income taxes
- Earned income credit is available to them
- It is their responsibility to pay recapture taxes (such as the tax from the recapture of education creditors).
- Their goal is to open an IRA
- As a parent, you want to provide your child with the opportunity to learn about taxes
In the first two cases, the main motivation for filing would be to obtain a refund; in the others, it would be to start saving for retirement or to learn about personal finance.
Recovering withheld taxes
It is possible to request an exemption for children who do not expect to owe any income taxes (and did not owe income taxes the previous filing year) by filing Form W-4 in advance.
As a result of the Tax Cuts and Jobs Act, Form 1040EZ, which was previously used for simple individual taxes, is no longer valid for tax years 2018 and beyond.
Reporting self-employment income
The child can use Form 1040 and Schedule C to report self-employment income and determine profit (Schedule C-EZ is no longer used for Form 1040EZ). In the case that your child makes $400 or more through self-employment—or a lower threshold of $108.28 in the case that he or she is employed by a church or religious organization exempt from employer Social Security and Medicare taxes—they must file a tax return.
Your child may have to pay self-employment taxes of 15.3%, even if he or she does not owe income tax.8 Use Schedule SE to find out if your child owes self-employment taxes (essentially Social Security and Medicare taxes).
Earning Social Security work credits through the Social Security Administration
The Federal Insurance Contributions Act (FICA) or self-employment tax must be paid by children when they earn a sufficient amount of money, file the appropriate tax returns, and earn the appropriate amount of money. A single credit costs $1,510 (increasing to $1,640 by 2023). Your child can earn a maximum of four credits per year.
Employers automatically deduct FICA tax from your child’s paychecks if the earnings are from a covered job. Self-employed individuals pay self-employment taxes quarterly or at the time of filing an income tax return.
The process of opening an Individual Retirement Account (IRA)
If your child has earned income, it is perfectly legal for them to open an individual retirement account (IRA). Earned income is generated by either a job or self-employment.
Investing in an IRA is a great way for your child to start saving for retirement while retaining a significant amount of their earnings. If you can afford it, consider matching your child’s contributions.
In addition, it helps them learn about matching funds, which they may encounter later if they have a 401(k) at work. If the child qualifies for a Roth IRA, it is likely to make sense to open one so they can receive decades of compound interest before retirement and tax-free withdrawals after retirement.
Education-related filings
In some cases, children may also be able to benefit from filing income taxes, including learning how the tax system works and developing sound filing habits for the future.
It is important to teach your child how the tax system works, even if he or she does not qualify for a refund or Social Security credit.
Filing a Tax Return with Your Child
The following information will help you assist your child with their income tax filing:
- You can begin preparing your child’s income tax returns at any age, even before they become eligible to vote.
- The IRS Publication 929 states, “A parent or guardian of a child must file the child’s return on the child’s behalf if the child is unable to do so for any reason, such as age.”
- You should inform the IRS as soon as possible if you receive a tax deficiency notice or are audited regarding your child.
- Publication 929 of the IRS states that “the IRS will attempt to resolve the issue with the parents or guardians of the child within their authority.”
How to report your child’s income on your tax return
The income of your child may not need to be reported separately on your tax return if:
- There are no earned incomes for your child, only interest, dividends, and capital gains.
- As of the end of the year, your child was under the age of 19 (or under the age of 24 if he or she was a full-time student).
- There was less than $11,000 in gross income for your child.
- For the year, your child does not file a joint return.
- The child’s name and Social Security number were not used to apply overpayments from the previous year (or from any amended return) to this year.
- According to backup withholding rules, your child did not pay federal income tax.
- Using the special tax rules for children requires you to use your return.
Make sure your child understands the basics of Social Security and Medicare.
Using IRS Form 8814, you can report your child’s unearned income on your tax return. However, you may have to pay a higher tax rate than if your child filed their own return. It depends on the amount of unearned income your child reports.
Tax Education for Children
Start talking about taxes as soon as your child starts earning their own money.
- Review your first paycheck stub. Discuss gross earnings, income tax deductions, and FICA deductions (Social Security and Medicare).
- The amount of income taxes withheld may be refunded to your child, depending on their total income, but FICA deductions will not be refunded.
- During this time, you may want to explain what Social Security and Medicare are and how earning credits in these programs can benefit you.
- Discuss the process and the forms your child is likely to need to file if their self-employment income exceeds $400, as well as the importance of keeping receipts for expenses.
- Explain that two pieces of information are required on every income tax form: the taxpayer’s name and his or her tax identification number (TIN). Make sure your child knows not to use nicknames on tax returns so that the IRS can match the data they have on file.
- If they are ready and have all of the necessary documentation, they can file earlier than April 15. The IRS usually begins accepting returns around the end of January each year.
- Your child should be aware that tax records should be kept confidential and not left out in the open for prying eyes to see.
- Whenever possible, get your child to sign their own tax returns and forms. Remind them that if their return isn’t honest, they will be lying under oath.
- It is important to remember to pay attention to taxes, to file on time, and to take the IRS’s obligations seriously.
In 2021, what is the Child Tax Credit?
According to the American Rescue Plan, the Child Tax Credit for 2021 will rise to $3,600 per qualifying dependent. The credit is based on income requirements.
Is it necessary for minors to file taxes?
When your child earns a minimum of $12,950 (increasing to $13,850 in 2023), they must file taxes. If your child has only unearned income, the threshold is $1,150 (increasing to $1,250 in 2023).45 If they have both earned and unearned income, it is $1,150 ($1,250 in 2023) or their earned income plus $400—whichever is greater. In the case that the minor is self-employed, they will owe self-employment tax when they reach $400.
For a child, what is the standard deduction?
Dependents may deduct $1,150 ($1,250 for 2023) or their earned income plus $400.45 for 2022.
You cannot deduct more than the basic standard deduction for your filing status.
Conclusion
Your responsibility as a parent or guardian is to explain and teach your child how to file income tax returns. Begin early, be patient, and take your child through each step carefully. Explain as much as you need to, but don’t feel compelled to address every nook and cranny of tax law. In all honesty, that can be pretty difficult, even for experienced taxpayers. If you have any questions, consult a tax professional.
