While many children and teens may not owe taxes, certain situations require them to file a tax return. This guide will help you determine whether your child needs to file an income tax return for the 2024 tax year.
Step 1: Understand Key Tax Concepts
Before assessing filing requirements, familiarize yourself with these terms:
Child for IRS Purposes: An individual under 19 years old at the end of the tax year or under 24 if they are a full-time student. The child must also meet other criteria:
Relationship Test: The child must be your son, daughter, stepchild, foster child, brother, sister, step-sibling, or a descendant of any of these (e.g., grandchild or niece/nephew).
Age Test: The child must be under age 19 at the end of the tax year, or under age 24 and a full-time student, or any age if permanently and totally disabled.
Residency Test: The child must have lived with you for more than half the year, except for temporary absences (e.g., for school, vacation, or medical care).
Support Test: The child must not have provided more than half of their own support during the tax year.
Joint Return Test: The child cannot file a joint return with a spouse unless it was only to claim a refund of withheld taxes.
Earned Income: Income received from work performed, including wages, salaries, tips, and taxable scholarship and fellowship grants.
Unearned Income: Income not earned from work, such as taxable interest, ordinary dividends, capital gain distributions, unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust.
Step 2: Determine Filing Requirements
A child's obligation to file a tax return depends on their income type and amount. For the 2024 tax year, refer to the following thresholds:
Single Dependents (Under 65 and Not Blind):
Unearned Income: File a return if unearned income was more than $1,300.
Earned Income: File a return if earned income was more than $14,600.
Gross Income: File a return if gross income was more than the larger of:
$1,300, or
Your earned income (up to $14,150) plus $450.
Married Dependents (Under 65 and Not Blind):
Unearned Income: File a return if unearned income was more than $1,300.
Earned Income: File a return if earned income was more than $14,600.
Gross Income: File a return if gross income was more than the larger of:
$1,300, or
Your earned income (up to $14,150) plus $450.
Additional Considerations:
Self-Employment Income: If the child's net earnings from self-employment are $400 or more, they must file a return to pay self-employment taxes.
Special Situations: The child must also file if they owe additional taxes, such as:
Alternative minimum tax.
Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account.
Social Security and Medicare tax on tips not reported to the employer or on wages received from an employer who didn't withhold these taxes.
Uncollected Social Security and Medicare or RRTA tax on tips reported to the employer or on group-term life insurance.
Write-in taxes, including uncollected Social Security and Medicare or RRTA tax on tips or group-term life insurance, tax on excess golden parachute payments, or excise tax on insider stock compensation from an expatriated corporation.
Household employment taxes.
Step 3: Understand Dependency and Filing
Even if your child files a tax return, you can still claim them as a dependent on your tax return if they meet these criteria:
They provide less than 50% of their own financial support.
They meet all other requirements to be a qualifying child or relative.
Step 4: Consider Reporting Your Child’s Income on Your Return
In certain cases, parents can report their child's unearned income on their own tax return using Form 8814. This option may simplify filing but could result in higher taxes, as the child's income will be taxed at the parent's marginal tax rate. Earned income cannot be reported on the parent's return.
Step 5: Understand the Kiddie Tax
The Kiddie Tax applies to a child's unearned income over $2,500. Any unearned income exceeding this threshold is taxed at the parent's marginal tax rate. The Kiddie Tax is reported on Form 8615, which should be attached to the child's return.
Step 6: Explore Benefits of Filing a Tax Return
Even if not required, filing a tax return may benefit your child:
Refunds: If your child had taxes withheld from their paycheck, they might qualify for a refund.
Earned Income Credit (EIC): If your child has earned income and meets the requirements, they might qualify for the EIC.
IRA Contributions: Filing a return can document earned income, allowing your child to contribute to an IRA and begin building savings.
Educational Experience: Filing taxes teaches your child important financial skills and sets a foundation for future tax compliance.
Step 7: Tax Opportunities and Savings
If your child has earned income, they have the opportunity to contribute to an IRA. This can provide significant tax and financial benefits:
Traditional IRA: Contributions may be tax-deductible, reducing taxable income if your child files a return. The funds grow tax-deferred until withdrawn.
Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals (including earnings) are tax-free, offering a long-term tax advantage.
Contribution Limits: For 2024, your child can contribute up to $7,000 or their total earned income for the year, whichever is less.
Benefits of Starting Early:
Contributions grow over time through compound interest, making even small contributions at an early age highly impactful.
Filing taxes to report earned income documents eligibility for IRA contributions, paving the way for lifelong savings habits.
Step 8: Consult a Tax Professional if Uncertain
Tax laws can be complex, and your child's specific situation may involve unique considerations. If you're unsure about whether your child needs to file or how to maximize potential benefits, consult a tax professional for guidance.
By following these steps, you can determine whether your child is required to file an income tax return, ensure compliance with tax laws, and take advantage of potential financial benefits.
This post may not contain a complete analysis of the tax issues discussed herein and does not represent official conclusions or advice regarding the matter.