As your child moves toward adulthood, you face several milestone decisions. In each case, part of the decision involves 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 their growing-up experience, is the filing of that first income tax return in your child's name.
Most students are not taught how to file taxes in school, even though the IRS provides an entire website for teachers titled Understanding Taxes. Reasons vary from underfunding to lack of interest on the part of students to a general failure of the education system to identify skills students need. This has resulted in a finding by the FINRA Foundation 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 dim 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 and/or obtaining guidance from tax professionals. This article is designed as a parent's "quick guide" to this subject. It 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.
Dependent Child Status
Some people mistakenly believe their child's status as a dependent means they don't have to file taxes. That is simply not true. Dependent child status does not excuse your child from filing an income tax return if they meet any of the tests in the section titled "When Your Child Must File" below.
To qualify as your dependent, your child must:
- Be a citizen or legal resident;
- Not file a joint return (if married);
- Be your son, daughter, stepchild, eligible foster child, sibling, half sibling, step sibling, adopted child, or an offspring of any of them;
- 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 (some exceptions apply);
- Rely on you for at least half their support; and
- Be claimed as a dependent only by you.
It's worth noting that with passage of the Tax Cuts and Jobs Act in 2017, personal exemptions for parents and others with dependents went away. 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 credit, the American Opportunity Education Credit, the student loan interest deduction, and the medical expense deduction.
When Your Child Must File
Four tests determine whether a child must file a federal income tax return. A child who meets any one of these tests, must file:
- The child has unearned income (from investment interest, gains, et al.) above $1,100,
- The child has earned income above $12,200,
- The child's gross income (earned plus unearned) is greater than the larger of $1,100 or earned income plus $350, or
- 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 those 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 except unearned income, you can avoid a separate filing for your child by making an election described later in this article.
When Your Child Should File
Your child should file a federal income tax return even though it isn't required if:
- Incomes taxes were withheld from earnings,
- They qualify for the earned income credit,
- They have enough income to earn Social Security work credits,
- They want to open an IRA, or
- 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 from the IRS.
To receive a refund, your child must file IRS Form 1040. (Form 1040EZ, used previously, is no longer valid.) Chances are your child will only have to file Form 1040 and will not have to include any additional schedules. The child must sign the form, attach a copy of any Form W-2 provided by the employer, and the IRS will process the refund. Even if the amounts withheld are small, you should assist your child with filing the Form 1040 to request a refund. It is quick, simple, and—most importantly—it teaches your child that every tax dollar counts.
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 ($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.
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 2019, your child must earn $1,360 to obtain a single credit. 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 in April.
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 if they have earned income, it is perfectly legal. By the way, earned income can come from a job as an employee or through self-employment.
Although your child can open either a traditional or Roth IRA and contribute up to 100% of net income, a Roth IRA makes the most sense since interest will accrue tax free for many years. What's more, the contributions (though not the earnings on that money) can be withdrawn tax and penalty free at any time.
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 and 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 You 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, 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, and
- 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 (up to 37%) than if the child filed their own tax return. It all depends on the amount of unearned income your child reports.
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 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 (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. The IRS typically begins accepting returns sometime in 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 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 experienced taxpayers. Finally, consult a tax professional if you get stuck.