Kids with cash: Do minors have to pay taxes?
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As parents, many of us might not make the connection between kids and taxes when it comes to jobs, at least until they’re teenagers. Do kids have to pay taxes if they’re dependents? The answer might surprise you. Whether you’ve got a little one with a lemonade stand empire, or a bustling babysitting business, those hard-earned dollars might need to meet the taxman. Here’s what you need to know about kids and filing tax returns.
Legal age for paying taxes in the U.S.
In the U.S., tax laws and agencies like the IRS don’t set age guidelines. If you earn income and meet certain criteria, you're required to file a federal and state tax return for the tax years you earned income. You don’t age out of the system and there isn’t an age where you don’t have to pay taxes on earned income.
Earned income: This is any money your child receives as compensation for the work they do. Examples include wages from a part-time job or babysitting income.
Unearned income: This type of income includes interest, dividends, and capital gains from investments, as well as gifts or inheritances. Typically it’s passive income; it does not involve actively working for the money earned. Any unearned income a child receives over $1,250 may be taxed under the “kiddie tax.” If your child’s unearned income exceeds $2,500 in 2023, they may owe taxes at the rate of their parents’ tax bracket.
So what does that mean for minors? Well, depending on their age and income level, they may or may not need to pay taxes and/or file a tax return.
Important note on filing vs. owing taxes: If a minor owes taxes, they must either file an individual tax return or, in certain scenarios, a parent or legal guardian may elect to report their child’s earned and unearned income on their returns instead of filing separate returns for their child. For more details, consult IRS dependents, standard deduction, and filing information.
Here's a quick breakdown of tax filing obligations for qualifying child dependents:
Unearned income: For the 2023 tax year, if your child received more than $1,250 in unearned income such as interest, dividends, or other types of passive or unearned income, they must report their unearned income.
Earned income: If your child earns any wages from a job, they need to file taxes if their income exceeds the standard deduction for single taxpayers, which was $13,850 in 2023.
Gross income: Your dependent child must also file taxes if their gross income (both earned and unearned) exceeds the larger of:
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$1,250
- or -
Earned income up to $13,350 plus $400
Who's responsible for filing taxes?
Generally, a dependent child who meets the criteria for income must file a personal income tax return. However, there are some circumstances in which a parent must or may elect to file on behalf of their dependent child. According to the IRS, “A parent or guardian must file a tax return for dependents who are required to file but aren't able to file for themselves.”
Tax implications of self-employment for kids
If your child has a side business or is self-employed, they may also have to pay taxes on their earnings. In this case, they will need to file a separate tax return using Form 1040. This form allows them to report their income and expenses from their self-employment activity.
It’s important for kids who are self-employed to keep detailed records of all their income and expenses related to the business. They may also be able to take advantage of deductions and credits that can lower their taxable income.
What about kids with investments?
If your child has investments, such as stocks or bonds, they may have to pay taxes on any earnings from those investments. This is known as the "kiddie tax" and it applies to kids under 18 years old (or under 24 if they are full-time students). Depending on the amount of investment income, your child may be taxed at their own rate or at your rate as the parent.
Other important tax considerations for minors
When it comes to taxes, there are other considerations for minors. For example, in the U.S., unearned income (like interest from a savings account) could be subject to the "kiddie tax." Depending on the circumstances, the kiddie tax might apply to some kids under 18, under 19, and college students under 24.
Filing as a family
Yes, you can file your return as a family, known as filing a joint return. This option may be beneficial for families with minors who have earned income, as it allows them to take advantage of certain tax deductions and credits. However, keep in mind that if a minor has significant unearned income (such as from an inheritance), they may still be subject to the kiddie tax even when filing jointly with their parents.
Trust funds and inheritance
The answer to this question depends on the type of trust fund or inheritance. Under some circumstances, your child may have to pay taxes on income earned from the assets in the trust. However, some distributions may not be taxable. It's important to note that every situation is different and it's always best to consult with a tax professional for specific advice. They can help you understand what types of investments
Custodial accounts
A custodial account is a type of financial account that is created by an adult on behalf of a minor. This can include accounts such as the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). The purpose of these accounts is to hold assets for the benefit of the minor until they reach adulthood or other specified criteria.
UGMA/UTMA brokerage accounts are generally subject to taxation. Earnings generated from these custodial accounts may be subject to taxes. Custodial accounts are not just limited to cash and investments. They might also hold real estate, stocks, bonds, and other assets.
Other accounts, such as educational accounts, scholarships, and grants may or may not be taxable. When thinking about your child dependents, it’s important to consider all potential sources of income, whether earned or unearned. Consider consulting a tax professional to help navigate your family’s unique responsibilities.
Tax deductions and credits for minors & families
Just like adults, minors can also take advantage of tax deductions and credits to reduce their taxable income or even receive a refund. Here are a few to keep in mind when discussing with your tax professional to see if you qualify:
Dependent exemption.
Child and Dependent Care Tax Credit
Education tax credits
Child tax credit
Adoption tax credit
Medical and dental expense.
Retirement savings contributions
Education expenses
Charitable donation credits
FAQs on minor children paying taxes
Q: Can minors be claimed as dependent if they have their own income?
A: Minors can typically still be claimed as dependents even if they have their own income. However, the amount of their income may affect how much you can claim for them on your taxes.
Q: Do minors have to pay Social Security and Medicare taxes?
A: If the minor works for someone else, they will likely have these taxes withheld from their paycheck. Self-employed minors may need to pay these taxes themselves. Always consult a reputable tax professional and/or the latest IRS guidelines to determine your child’s responsibility.
Q: Can minors earn a tax refund?
A: If a qualifying minor has paid more in taxes than they owe, they can receive a tax refund just like any other taxpayer.
Q: What happens if a minor doesn't file their taxes?
A: If the minor is required to file a tax return but fails to do so, they may face penalties and interest on any unpaid taxes.
Q: Can a minor claim tax credits and deductions?
A: If the minor meets eligibility requirements, they can claim relevant tax credits and deductions just like any other taxpayer. This applies to both federal tax and state returns.
Q: What happens to a minor's taxes if their parents are divorced?
A: If your parents are divorced, the parent who has custodial rights is usually responsible for ensuring proper filing or handling of dependent taxes. If you earn income, it's smart for both parents to communicate and ensure that everyone understands the tax situation to avoid any misunderstandings.
Q: How can minors manage their taxes if they have multiple sources of income?
A: Keep records and receipts for all your income sources, whether earned or unearned. Using tax software for organization and record-keeping can help. It’s also a must to work under the supervision of your parent or legal guardian and consider consulting with a tax professional who can help you understand how to report your income correctly and take advantage of any deductions or credits you’re eligible for.
The most important thing to remember when managing taxes for a dependent minor is they may have tax obligations. It's important to understand these obligations to avoid any potential issues down the line. Need more help? Reach out to a tax professional.
Want more smart money tips and insights? Visit the Greenlight Learning Center for helpful resources on all things family and finances.
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