Do I Have to Claim My Child’s Survivor Benefits on Taxes?

Survivor benefits provide financial support for children who have lost a parent, but they also come with tax implications that many families may not fully understand. If your child receives these benefits, you might be wondering whether they need to be reported on a tax return and if they affect your own taxes.

Understanding how survivor benefits are taxed is important for avoiding penalties and ensuring compliance with IRS rules.

Tax Filing Requirements

The IRS treats survivor benefits received by a child differently than income from a job or investments. These benefits are not taxable to the parent or guardian but may be taxable to the child if their total income exceeds certain limits. Since a child is considered a separate taxpayer, they may need to file their own tax return depending on the amount of benefits received and any additional income.

A child who receives only survivor benefits typically does not need to file a return. However, if they have other sources of income, such as interest from a savings account or dividends, the total amount must be considered. The IRS uses a formula to determine whether a portion of the benefits is taxable. If half the survivor benefits plus any other income exceeds a base amount, some of the benefits may be taxable.

Parents may choose to include their child’s unearned income on their own return using IRS Form 8814. This option can simplify filing but may result in a higher tax rate than if the child filed separately. Whether this approach is beneficial depends on the specific tax situation.

Income Thresholds

The amount of survivor benefits a child receives each year plays a role in determining whether any portion is taxable. While these benefits alone typically do not trigger a tax liability, the IRS considers a child’s total income when assessing tax obligations.

For 2024, the IRS sets a base amount of $25,000 for single filers when calculating the taxable portion of Social Security benefits, but this does not apply directly to a child’s income. Instead, the relevant threshold is based on whether half of the child’s annual survivor benefits, when added to their other income, exceeds a specific limit. If this sum surpasses $1,250, a portion of the benefits could be taxable. This threshold is adjusted periodically, so checking the most recent IRS guidelines is advisable.

If a child’s total unearned income exceeds $2,600 for the year, they may also be subject to the “kiddie tax,” which taxes unearned income at the parent’s marginal rate rather than the child’s lower rate. Survivor benefits alone do not trigger the kiddie tax, but when combined with other income sources, it can become a factor.

Impact on Household Finances

Receiving survivor benefits for a child can help cover essential expenses but may also affect eligibility for need-based assistance programs. Programs like Supplemental Nutrition Assistance Program (SNAP) and Medicaid consider total household income when determining benefits. While survivor benefits are not counted as earned income, they may still be factored into overall financial resources, potentially reducing or eliminating eligibility for some assistance.

Education savings is another consideration. Setting aside funds in a tax-advantaged account such as a 529 plan allows money to grow tax-free when used for qualified education costs. However, contributions should be weighed against immediate financial needs, as survivor benefits are often necessary for covering day-to-day expenses.

Documents to Keep

Maintaining thorough records is necessary for tax compliance and financial planning. The Social Security Administration (SSA) issues an annual Form SSA-1099, detailing the total benefits received. This document should be retained for tax purposes and reviewed for accuracy. If errors arise, requesting a corrected statement from the SSA can help prevent filing complications.

Bank statements should also be kept to track how survivor benefits are used. While there are no federal restrictions on spending, maintaining clear records can be helpful if questions arise regarding financial decisions made on behalf of the child. If benefits are deposited into a dedicated savings account or used for specific expenses like tuition or medical costs, a detailed paper trail can provide clarity in case of audits or eligibility reviews for government programs.

Penalties for Misreporting

Failing to properly report taxable survivor benefits can lead to penalties and interest on unpaid taxes. If a child’s income exceeds the filing threshold and a return is not submitted, the IRS may assess a failure-to-file penalty, which starts at 5% of the unpaid tax per month, up to a maximum of 25%. If taxes are owed and not paid on time, an additional failure-to-pay penalty of 0.5% per month applies.

If incorrect information is provided on a return due to an error or omission, the IRS may impose accuracy-related penalties, typically amounting to 20% of any underpaid tax. In cases of intentional misreporting, civil fraud penalties could apply, leading to a penalty of 75% of the underreported tax. While most families will not face such severe consequences, ensuring accurate reporting helps avoid unnecessary scrutiny. Keeping organized records and consulting a tax professional if there is uncertainty about filing requirements can prevent costly mistakes.