If you’re anything like me your probably wondering how can a child need to file a tax return? In other words what are the tax rules for children and dependents? Well that’s a very good question. A child or dependent can have two kinds of income. 1) Earned income which includes salaries, wages, tips and other payments for a personal service performed. 2) Unearned income which is interest, dividend and/or capital gains.
In this article I will be discussing the following items as it pertains to your child:
- The filing requirements for dependent
- Tax for certain children who have unearned income
- When a parent can elect to report child/dependents interest and dividends
Filing requirements for dependents
Whether a child and/or dependent has to file a tax return depends on the amount of their earned or unearned income.
Child with Earned Income Only
A dependent whose gross income is only earned income must file a return if the gross income is more than $6100. For example, Renaldo is 17. His mother claims an exemption for him on her income tax return. He worked full time during the summer and earned $7,500 in wages. He did not have any unearned income.
He must file a tax return because he has earned income over $6,100.
Child with Unearned Income Only
A dependent whose gross income is only unearned income must file a return if the gross income is more than $1000. For example, Savanna is 16. Her parents can claim an exemption for her on their income tax return. Her only income was $1,900 interest income. Savanna must file taxes because she has unearned income of more than $1,000.
If your child and/or dependent has worked and had taxes taken out but doesn’t meet the filing requirements they can still file to get a refund.
Parent elects to report a child’s interest and/or dividends
A parent can make an election to include their child’s interest and/or dividend income in their tax return so the child doesn’t have to file a return. The child has to be under the age of 19, have income only from interest and dividends, and gross income cannot be over 10,000. If you elect to claim your child’s return on your tax return then your child will not have to file a tax return.
If you elect to claim your child’s income on your taxes you must file form 8814 along with your 1040. A separate 8814 must be attached for each qualifying child.
Keep in mind that if you are electing to claim your child’s income on your tax return, your tax rate may be higher. The child rate when claiming your child’s income on your taxes may be 10%. However, if your child files a separate return they may pay 0%.
Not only do you pay a higher tax rate but your deductions on credits may be limited. For example your deductions for your IRA or student loan interest might be limited as a result of claiming your child’s income on your tax return.
Whether or not you choose to file a separate return for your child, child interest income over $2,000 are taxed at the parent’s rate.