As your child moves toward adulthood, you face several milestone decisions that involve, in part, a desire to help your child become more independent and responsible. But one milestone you may not anticipate—even though it will be part of your child's growing-up experience—is the filing of that first income tax return in their name.
Reasons vary from underfunding and a lack of interest on the part of students to a general failure of the education system to identify skills students need. The FINRA Foundation, an investor education resource, has stated that only 17% of respondents ages 18 to 34 are able to demonstrate basic financial literacy, including how to file taxes.
Most children have only a vague idea of what income taxes are, let alone the specific rules they are required to meet. It becomes your role as a parent to help your child initiate this rite of passage by evaluating tax-filing requirements or obtaining guidance from tax professionals.
This quick guide for parents covers the basic rules that you should know for determining when your child must (or should) file. It also offers suggestions for helping your child take responsibility for their own tax chores in the future.
- Because children generally don't receive instruction in school on how to file income taxes, parents need to teach their kids when and how to do it.
- Dependents must file under certain circumstances if they have earned and/or unearned income.
- Other reasons to file include owing taxes, recovering withheld taxes, earning Social Security credits, qualifying for an earned income credit, and opening a retirement account.
- Your child might be allowed to skip filing a separate tax return and include their income on your return under certain circumstances, such as only having unearned income (interest, dividends, or capital gains).
Dependent Child Status
Some people mistakenly believe their child's status as a dependent means they don't have to file taxes. But dependent child status does not excuse your child from filing an income tax return if they meet any of the tests in the section entitled "When Your Child Must File," below.
To qualify as your dependent, your child must:
- Have the required Social Security number (SSN)
- Not file a joint return (if married)
- Be your son, daughter, adopted child, stepchild, eligible foster child, sibling, half-sibling, step-sibling, or an offspring of any of these
- Be under age 19 at the end of the tax year, or under age 24 if a full-time student, or any age if permanently and totally disabled
- Live with you for more than half the year in the U.S.
It's worth noting that with passage of the Tax Cuts and Jobs Act in 2017, personal exemptions for parents and others with dependents were eliminated. However, several other tax-saving opportunities remain. These include:
- Head of household filing status
- The child tax credit
- The child and dependent care credit
- The earned income tax credit
- The American opportunity credit and lifetime learning credit
- The student loan interest deduction
- The medical expense deduction
When Your Child Must File
In 2018 and 2019, certain children were taxed using the estate and trust tax brackets, but in 2020, for income above a certain level, the tax rate of the parents will be used. Four tests determine whether a dependent child must file a federal income tax return. A child who meets any one of these tests in 2020 must file:
- If the child only has unearned income (from investment interest, gains, et al) above $1,100
- If the child only has earned income above $12,400
- If the child has both earned any unearned income, and the child's gross income (earned plus unearned) is greater than either $12,400 or their earned income plus $350, whichever is less. (Essentially, this means a dependent child must file if the child's unearned income is more than $350 and they have any earned income, although there is a minimum threshold of $1,100 gross income)
- The child's net earnings from self-employment are $400 or more
Additional rules apply for children who are blind, who owe Social Security and Medicare taxes on tips or wages not reported to or withheld by the employer, or who receive wages from churches exempt from employer Social Security and Medicare taxes.
If filing a return is required by the first test above and the child has no other income besides unearned income, you can avoid a separate filing for your child by making an election described later in this article.
Four tests determine whether or not a dependent child must file an income tax return with the IRS.
When Your Child Should File
Your child should file a federal income tax return even though it isn't required for the reasons above, if:
- Incomes taxes were withheld from earnings
- They qualify for the earned income credit
- They owe recapture taxes (such as the tax from recapture of an education creditor)
- They want to open an IRA
- You want your child to gain the educational experience of filing taxes.
In the first two cases, the main reason for filing would be to obtain a refund if one is due. The others are income dependent or based on taking advantage of an opportunity to begin saving for retirement or to begin learning about personal finance.
Filing to Recover Taxes Withheld
Some employers automatically withhold part of pay for income taxes. By filing Form W-4 in advance, children who do not expect to owe any income tax (and did not owe income tax the previous filing year) can request an exemption. If the employer already has withheld taxes, your child should file a return to receive a refund of all taxes withheld from the IRS.
To receive a refund, your child must file IRS Form 1040. (Form 1040EZ, used previously for simple individual taxes, is no longer valid for tax years 2018 and beyond as a result of the Tax Cuts and Jobs Act.)
Filing to Report Self-Employment Income
Your child can report income from self-employment using Form 1040 and Schedule C (to determine profit). (As with Form 1040EZ, Schedule C-EZ is no longer used.) If your child has net self-employment income of $400 or more (or a lower threshold of $108.28 if your child is employed by a church or religious organization exempt from employer Social Security and Medicare taxes), the child must file a tax return.
To determine if your child owes self-employment taxes (essentially Social Security and Medicare taxes for those who are self-employed), use Schedule SE. Your child may have to pay self-employment taxes of 15.3%, even if no income tax is owed.
Filing to Earn Social Security Work Credits
Children can begin earning work credits toward future Social Security and Medicare benefits when they earn a sufficient amount of money, file the appropriate tax returns, and pay Federal Insurance Contribution Act (FICA) or self-employment tax. For 2020, your child must earn $1,410 to obtain a single credit ($1,470 in 2021). They can earn a maximum of four credits per year.
If the earnings come from a covered job, your child's employer will automatically take the FICA tax out of their paycheck. If the earnings come from self-employment, your child pays self-employment taxes quarterly or when filing.
Filing to Open an IRA
It might seem a little premature for your child to consider opening an individual retirement account (IRA)—the IRS calls it an individual retirement arrangement—but it is perfectly legal if they have earned income. By the way, earned income can come from a job as an employee or through self-employment.
If you can afford to, consider matching your child's contributions to that IRA. The total contribution must be no more than the child's total earnings for the year. That lets your child start saving for retirement but keep more of their own earnings. It also teaches them about the idea of matching funds, which they may encounter later if they have a 401(k) at work.
Filing for Educational Purposes
Filing income taxes can teach children how the U.S. tax system works while helping them create sound filing habits for later in life. In some cases, it also can help children start saving money or earning benefits for the future as noted above.
Even if your child doesn't qualify for a refund, want to earn Social Security credits, or open a retirement account, learning how the tax system works is important enough to justify the effort.
What Parents Need to Know
When it comes to helping your child file their income taxes, you should know the following:
- Legally, your child bears primary responsibility for filing and signing their own income tax returns. This responsibility can begin at any age, perhaps well before your child becomes eligible to vote.
- According to IRS Publication 929, "If a child can't file his or her own return for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child."
- Your child can receive tax deficiency notices and even be audited. If this happens, you should immediately notify the IRS that the action concerns a child.
- According to IRS Publication 929, "The IRS will try to resolve the matter with the parent(s) or guardian(s) of the child consistent with their authority."
Reporting Your Child's Income on Your Tax Return
Your child might be allowed to skip filing a separate tax return and include their income on your return in 2020, but only if:
- Your child's only income consists of interest, dividends, and capital gains (unearned income).
- Your child was under age 19 (or under age 24 if a full-time student) at the end of the year.
- Your child's gross income was less than $11,000.
- Your child would be required to file a return unless you make this election.
- Your child doesn’t file a joint return for the year.
- No estimated tax payments were made for the year, and no overpayments from the previous year (or from any amended return) were applied to this year under your child's name and Social Security number.
- No federal income tax was withheld from your child's income under the backup withholding rules.
- You are the parent whose return must be used when applying the special tax rules for children.
Include your child's unearned income on your tax return by using IRS Form 8814. It's important to note that doing so could result in a higher tax rate than if the child filed their own tax return. It all depends on the amount of unearned income your child reports.
Explain to your child the basics of Social Security and Medicare and the benefits of earning credits in these programs.
Things to Discuss With Your Child
When your child starts to earn their own money, start talking about taxes right away.
- Go over that first paycheck stub. Talk about gross earnings, any deductions for income taxes, and any deductions for FICA taxes (Social Security and Medicare).
- Tell your child that, depending on their total income for the year, they can probably receive a refund of income taxes withheld but that FICA deductions will not be refunded and will continue to be withheld from earned wages.
- This would also be a good time to explain the basics of Social Security and Medicare and the benefits of earning credits in these programs.
- If it looks like your child's self-employment income will exceed $400, have the same discussion about that process and the different forms they may have to file as well as the need to keep receipts of expenses and why.
- Explain that two pieces of information are required on every income tax form: the taxpayer's name and tax identification number (TIN) (usually the Social Security number for children). Because the IRS wants these two items to match the data it has on file, remind your child not to use nicknames on tax returns.
- Emphasize that tax returns are normally due by April 15 each year but that they can file earlier if they are ready and have all necessary documentation. The IRS typically begins accepting returns sometime in late January.
- Make sure your child understands that tax records are confidential and that they should not leave them where prying eyes can see them.
- Encourage your child to sign their own tax return and forms if they are able. Remind them that they are signing under "penalty of perjury," meaning if their return isn't honest, they will be lying under oath.
- Reinforce the importance of paying attention to taxes, filing on time, and taking IRS obligations seriously.
The Bottom Line
It's up to you to discuss and teach income-tax filing to your child. The best way to do this is to start early, be patient, and walk your child through the process carefully. Fully explain as much as you need to but don't feel like you have to address every nook and cranny of tax law. After all, that can be pretty tough for even experienced taxpayers. Finally, consult a tax professional if you get stuck.