Should Your Child Pay Taxes?
Children and taxes are not always two words that are commonly thought of together. However, if your child worked during the summer, or is working during the school year, paying taxes could be a very real possibility.
According to Lisa DeRose, CPA, Director of Tax at Whisman Giordano & Associates, “A part-time job can be a great way for your child to learn about finances and taxes. It creates a sense of independence and understanding about money that will benefit both the parent and child in the long term.”
The 2019 situations that require your dependent child to file a federal income tax return are:
- The child has unearned income of more than $1,100. If your child has more than $2,200 of unearned income, he or she may be subject to a potentially complicated topic of the so-called "kiddie tax." The “kiddie tax,” under the Tax Cuts and Jobs Act (TCJA), taxes a child’s unearned income (interest, dividends, capital gains, etc.) at rates equivalent to trusts and estates. These rates can rise to as high as 37%, and 20% for long-term capital gains. Prior to the TCJA, the rates under the “kiddie tax” were equal to those of the child’s parents marginal tax rate.
- The child's gross income exceeds the greater of 1) $1,100, or 2) earned income up to $11,850 plus $350.
- The child's earned income exceeds $12,200.
- The child owes other taxes, such as the self-employment tax or the alternative minimum tax (AMT).
Even if your child isn't required to file a tax return, one should be filed if federal income tax was withheld for any reason and would be refunded if a return is filed. It's also necessary to take advantage of certain beneficial tax elections. An example would be the election to currently report accrued U.S. Savings Bond income that would be negated by the standard deduction amount applicable to your child.
Who's Responsible for Filing My Child's Return?
The child is generally responsible for filing their own tax return and for paying any tax, penalties and interest. If the child can't file their own return for any reason, then the person legally responsible for the child must file on their behalf. If the child can't sign the return, a parent or guardian must sign the child's name followed by the words "By (signature), parent or guardian for minor child." If you sign a child's tax return, you can deal with the IRS on all matters related to the return.
In general, a parent or guardian who doesn't sign can only provide information concerning the return and pay the child's tax bill. The parent or guardian isn't entitled to receive information from the IRS and can't legally bind the child to a potential tax bill arising from the return.
Can I Report My Child's Income on My Tax Return?
Parents can choose to report their children's income on their tax return if:
- The child will be under age 19 (or under age 24 if a full-time student) as of December 31, and
- All of the child's income is from interest and dividends, including certain capital gains distributions.
The rules for kids can be complicated in certain situations. As Lisa DeRose states, “It’s never too early to teach a child about money.” and thinks that it’s the role of a good parent to do so. As she states, “I’ve never met a parent who regretted teaching their child to be financially responsible.”
Whisman Giordano is here to help if you have questions about the tax consequences of working a part-time job, reporting unearned income from investments, the “kiddie tax,” as well as potential tax-saving opportunities that come with parenthood.
Whisman Giordano & Associates LLC
Certified Public Accountants
111 Continental Drive, Suite 210
Newark, DE 19713