The arrival of catalogs at my house have done quite a bit to up my daughter’s work ethic. She has it in her head to buy an American Girl doll, complete with accessories, and if you know anything about the brand, you know it’s not cheap. With that, she’s been offering to do all kinds of things around the house – and the office – in an effort to make money.
Kids often go through phases like this. When I was a kid, my brother pushed a mower for miles down our rural NC street in order to pay for a pair of first edition Air Jordans. I babysat, did office jobs and mowed a few yards myself to buy a unicorn purse (keep your snickers to yourself, I was a child of the 80s). Of course, this was all while we living at home and my parents were claiming us as dependents on their taxes. So how did this affect our taxes?
For most kids, like us, this is not a difficult question. Whether a child has to file his or her own return generally depends on two easily determined factors: whether the money is earned or passive and the amount of income.
Not being Rockefellers, all our income was earned. Earned income is what you make from wages, salary or self-employment; tips are also considered earned income. Wages from mowing grass and babysitting are considered earned income.
The rule for children and other dependents is that if the only income is earned and it is less than $5,700, there’s no need to file a federal income tax return (whew, the babysitting money was safe). Of course, you should check your state and local rules to see whether those returns might be required.
Even if your child doesn’t have to file a federal income tax return, he or she may want to file a return if federal income tax was withheld from income. This doesn’t usually happen for odd gigs like babysitting but would be required to have been withheld at a real job like my stint at the Winn-Dixie. Your child might also want to file if he or she qualifies for certain credits which would result in a refund.
The rules are different for unearned income like dividends and interest. For children under the age of 18, or under the age of 23 while a full-time student, the first $950 is considered tax-free and the next $950 is taxed at your child’s rate. Unearned income over $1,900 is taxed at the child’s parents’ tax rate (in other words, your own tax rate). This is what you might have heard referred to as the “kiddie tax.”
When there is a mix of earned and unearned income, it becomes more complicated. Generally, your child will have to file a return if his or her gross income was more than the larger of $950 or the amount of earned income (up to $5,400) plus $300.
Keep in mind that these rules apply to children who are dependents. Those who are not dependents because of their age or filing status (such as children who are married) or those who are emancipated have a different set of rules.
For more information about children, dependents, and taxes, check out Pub 929 (downloads as a pdf).
I understand the unicorn purse thing. I, too, was an 80s child. My Little Ponies were a big part of my life! Thanks for this post. I don’t have kids yet, but hope to some day. As someone who just started getting taxes done by herself (yes, my mom had her tax guy do my taxes for about 27 years) I’m learning the importance of seeing a tax professional very quickly! My friend does her own taxes, but I have to imagine she’s not getting the max return because there are just so many factors to consider.
Haha, thanks Allison!
While I agree that a dependent may not owe federal taxes on earned income below $5700, but what about self-employment taxes? I thought self-employment taxes were owed on self-employment income greater than $400 whether the taxpayer was a dependent or not.
Rose, thanks for your comment. You’re correct about the self-employment income though it can be a bit tricky, depending on how the income is generated. There are a number of exceptions which apply and, especially when it comes to kids, the hobby rules also come into play (as opposed to business/self-employment income).
If a taxpayer is subject to SE tax, you’re correct that the threshold is generally $400 of your net earnings.