Do Children Have to Pay Taxes on Their Income?
Understand if your child's income is taxable and how to navigate the IRS rules, including the Kiddie Tax.
Children’s income tax obligations can be complex. While many children do not earn enough to require filing, specific circumstances can create a tax requirement. Understanding these conditions is important for tax compliance.
When a Child Needs to File a Tax Return
A child’s obligation to file a tax return depends on the type and amount of income they receive. Income is categorized into earned income and unearned income. The IRS provides guidance on these requirements, including in Publication 929, “Tax Rules for Children and Dependents.”
Earned income comes from wages, salaries, tips, or self-employment earnings. For the 2024 tax year, a dependent child needs to file a tax return if their earned income exceeds $14,600. A filing requirement also exists if a child has net earnings from self-employment of $400 or more.
Unearned income includes investment income such as interest, dividends, and capital gains. For the 2024 tax year, a dependent child must file a tax return if their unearned income is more than $1,300. If a child has both earned and unearned income, their filing requirement is determined by a combination of these amounts.
Understanding the Kiddie Tax
The “Kiddie Tax” is a tax rule designed to prevent high-income individuals from reducing their tax liability by shifting investment income to their children, who might be in a lower tax bracket. This tax applies primarily to a child’s unearned income, such as interest, dividends, and capital gains. It does not apply to earned income.
The Kiddie Tax applies if a child meets certain age criteria and has unearned income above specific thresholds. For the 2024 tax year, it applies to children under 18 at year-end. It also applies to 18-year-olds and full-time students aged 19 to 23, provided their earned income does not exceed half of their support.
For the 2024 tax year, the first $1,300 of a child’s unearned income is typically tax-free. The next $1,300 of unearned income is taxed at the child’s own tax rate. Any unearned income exceeding $2,600 is then taxed at the parent’s marginal tax rate, rather than the child’s potentially lower rate. This rule ensures that significant investment income held by a child is taxed similarly to how it would be if held by the parent.
How to Report a Child’s Income
Once it is determined that a child has a tax filing requirement, there are generally two primary methods for reporting their income. The most common approach is for the child to file their own income tax return using Form 1040, the U.S. Individual Income Tax Return. This method is typically used when the child has earned income, or when their unearned income exceeds certain thresholds that prevent it from being reported on the parent’s return.
When filing a child’s tax return, necessary documents include Form W-2 for wages received, and Forms 1099-INT or 1099-DIV for interest and dividend income, respectively. If the Kiddie Tax applies and the child’s unearned income is above $2,600, Form 8615 must be completed and attached to the child’s Form 1040. This form calculates the tax on the child’s unearned income at the parent’s tax rate.
Parents may elect to include their child’s interest and dividend income on their own tax return, which can simplify the filing process. This option is available if the child’s unearned income consists only of interest and dividends, and the total amount is less than $12,500 for the 2024 tax year. To make this election, parents use Form 8814, attaching it to their own Form 1040.