Taxpayer asks:
Hi,
My husband and I have decided to open a bank account for our son. We’re going to give him an allowance every week. He gets to keep part of it and put the rest in the bank. If he saves a certain amount, he gets a bonus allowance. The point is to teach him to save.
My question for you is how do we report the money we’re giving him? And does he need to file taxes for the bank account? He is 8 years old and his allowance is $5 per week.
Taxgirl says:
What a great idea! I may have to try that one myself…
There are no income tax consequences to your son for an allowance; similarly, there are no income tax consequences to you for giving an allowance.
Technically, there could be gift tax consequences since an allowance is really a gift – but doing the math here, I’m guessing it’s rare that, together with your other gifts to your son, you hit gift tax type numbers ($13,000 per person per year for 2009).
As to the bank account, interest reported to your son might be subject to income tax. However, the amounts that you’re talking about are small enough that they likely won’t be… Assuming that you claim your son as a dependent and he has no earned income, he can earn up to $950 in unearned income (like interest and dividends) income tax free for 2009 for federal purposes. That amount is the equivalent of the personal exemption. There’s no need to report that income or file a return.
The next $950 would be taxable at your son’s own tax rate. After that, using the “kiddie tax” rules, he would be taxed at your (meaning his parents’) marginal tax rate. It sounds like neither of these situations would apply to you but I wanted you to be aware of them.
There are additional rules and exceptions which apply to the “kiddie tax” rules – I’m not going to discuss them here other than to say that the rules are much different if your child has earned income or significant unearned income. If that’s the case, you’ll want to consult with your tax professional.
It’s also worth pointing out that these are the federal rules – your state may have different rules. Again, consult with your tax professional.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl
As the economy continues on its wild ride, the IRS has announced a series of adjustments for tax brackets and other provisions for the 2009 tax year. These adjustments, in response to inflation, are required by law.
Note that these adjustments will affect your 2009 tax return, normally filed in early 2010. Your 2008 tax return (filed in 2009) is not affected.
Here are a few key tax provisions which have been adjusted for inflation:
Personal and Dependency Exemptions. Personal exemptions and those available for dependents will increase $150 to $3,650.
Standard Deductions. The standard deduction for married couples filing jointly will increase by $500 to $11,400. The standard deduction for singles and married couples filing separately will increase by $250 to $5,700. The standard deduction for head of household will increase by $350 to $8,350.
Kiddie Tax Threshold. The threshold for the kiddie tax will increase by $50 to $950.
Tax-bracket thresholds. Tax-bracket thresholds will increase for each filing status. I’ll post the new tax tables as soon as I can.
Earned income tax credit (EITC). The maximum EITC for families with two or more children will increase by $204 to $5,028. The income threshold in order to qualify will also rise: for joint return filers with two or more children, the threshold will be $43,415.
Gift Tax. The annual gift exclusion will rise by $1,000 to $13,000.
401(k) Contribution Limit. The 401(k) contribution will rise by $1,000 to $16,500.
It’s worth noting that there are some other adjustments, including those for retirement plans/contributions. Keep watching for specific information.
Taxpayer asks:
My son wants to know when he’ll have to file for taxes, he started mowing lawns this summer and is getting paid $25 per yard.
Taxgirl says:
Wow, I feel old. I used to get paid $10/yard for biggish yards in the country. *sigh*
Whether your son will have to file and pay depends on a lot of things. The two most important issues are his age and exactly how many of those yards he mows (his income).
The so-called “kiddie tax” is a term to describe when a child may be taxed at his or her parents’ rate. It has been around for about 20 years now.
Here’s how it works: for 2008, children under 19 and full-time students under 24 with earned income which is less than to half of support may have up to $1,700 in unearned income, meaning income such as dividends and interest on investments (not wages) before the kiddie tax kicks in. The first $850 is exempt from taxation and the next $850 is taxed at the child’s income tax rate.
But. Unearned income over $1,700, tax is computed at the parent’s tax rate. Earned income (wages or pay for, say, mowing the grass) is taxed at the child’s tax rate.
If your child has unearned income of $8500, that income can be included on a parent’s return. Otherwise, the child should file an individual return (see the exemptions from tax above).
Before you rush to include your child’s income on your personal return, don’t forget that this would add to your own adjusted gross income. While you may consider it the same pile of money for purposes of paying the tax, it can subject you to phase-outs or other limits.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
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Prior to 2006, children under the age of 14 who have unearned income (dividends and interest) over $1600 and are claimed as dependents must be taxed at their parent’s rates – this is the so-called "kiddie tax". For 2006, the age has increased to dependents who have reached age 18 (yes, this means that emancipated children and married children are not subject to the rules). The amount of the exemption has increased to $1700.
Sooo, the converse of this means that children aged 18 and under who are claimed as dependents and have less than $1700 in unearned income may be taxed at their own rates.
