Does My Child Have to File a Tax Return for Unearned Income?

Children earning money from investments, gifts, or other passive sources may need to file a tax return, even if they are dependents. The IRS has specific rules on when minors must report unearned income, and failing to comply could lead to penalties.

Dependent Status and Filing Thresholds

The IRS sets income thresholds that determine whether a dependent must file a tax return. These thresholds vary based on income type and are adjusted annually for inflation. In 2024, a single dependent under 65 must file if their unearned income exceeds $1,250, their earned income surpasses $13,850, or their total income is more than the larger of $1,250 or their earned income plus $400.

Unearned income includes interest, dividends, capital gains, and trust distributions. If a child receives investment income from a custodial account, they may need to file even without wages. The IRS also applies the “kiddie tax” to unearned income over $2,500, taxing it at the parent’s rate to prevent income shifting to lower tax brackets.

Situations Requiring a Return

A child’s tax filing obligation depends on their income type and amount. Earned wages, unearned income, self-employment earnings, and certain government benefits can all trigger a filing requirement.

Earned Wages

If a child works a part-time job, they must file a tax return if their earned income exceeds $13,850 in 2024. This includes wages from a W-2 job, tips, and other compensation.

Even if earnings are below the filing threshold, filing may still be beneficial. If an employer withholds federal income tax, a child must file to receive a refund. For example, if a child earns $5,000 from a summer job and has $500 withheld, they must file to claim that money back.

Children earning more than $400 from self-employment, such as babysitting or freelancing, must file to pay self-employment tax, which covers Social Security and Medicare contributions. The self-employment tax rate is 15.3%, meaning a child earning $1,000 from gig work would owe $153.

Unearned Earnings

Unearned income includes interest, dividends, and capital gains. If a child’s unearned income exceeds $1,250 in 2024, they must file a tax return.

Investment income above $2,500 is subject to the “kiddie tax.” The first $1,250 is tax-free, the next $1,250 is taxed at the child’s rate (typically 10%), and anything above $2,500 is taxed at the parent’s rate. For example, if a child earns $4,000 in dividends and capital gains, the first $1,250 is not taxed, the next $1,250 is taxed at 10%, and the remaining $1,500 is taxed at the parent’s rate, which could be as high as 37%.

Other Income Sources

Beyond wages and investments, certain income types can also require a child to file a tax return. If a child earns more than $400 from self-employment, they must file to pay self-employment tax. This applies to gig work such as tutoring, pet sitting, or selling crafts online.

Social Security benefits generally do not require a return unless combined with other taxable income. However, taxable scholarships or grants not used for tuition—such as payments for room and board—may be considered taxable income. For example, if a student receives a $10,000 scholarship, with $6,000 covering tuition and $4,000 used for housing, the $4,000 may be taxable and could require a return.

Deductions and Credits

When a child files a tax return, they may be eligible for deductions and credits that reduce taxable income or provide refunds.

The standard deduction for dependents in 2024 is up to $13,850 for those with earned income. If a child has both earned and unearned income, the deduction is the greater of $1,250 or their earned income plus $400.

Tax credits can also reduce a child’s tax liability. While dependents typically do not qualify for the Earned Income Tax Credit (EITC), refundable credits such as the Additional Child Tax Credit (ACTC) may apply if they have a portion of the Child Tax Credit that exceeds their tax liability.

For students, education-related tax benefits can help offset taxable scholarships or grants. The American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC) provide tax relief for qualified education expenses. While parents typically claim these credits, a child responsible for their own tuition payments may be eligible to claim them.

Effects on Parental Return

A dependent filing their own tax return can impact a parent’s tax situation. Parents who claim a child as a dependent benefit from tax advantages, including the Child Tax Credit (CTC) and education-related deductions. However, if a child earns enough to provide more than half of their own financial support, they may no longer qualify as a dependent, reducing the parent’s tax benefits.

Parents may also have the option to report a child’s investment income on their own return using IRS Form 8814. While this simplifies filing for the child, it can increase the parents’ taxable income, potentially affecting eligibility for tax benefits such as the Earned Income Tax Credit (EITC) or education credits.

Penalties for Noncompliance

Failing to file a required return can lead to penalties and interest on unpaid taxes. If a child owes taxes and does not file by the deadline, they may face a failure-to-file penalty of 5% of the unpaid tax per month, up to 25%. If taxes remain unpaid, an additional failure-to-pay penalty of 0.5% per month applies, with interest accruing at the federal short-term rate plus 3%.

For example, if a child owes $500 in taxes and does not file for six months, they could face penalties exceeding $125, plus interest.

If unearned income is not reported, the IRS may assess additional taxes and penalties under the “kiddie tax” rules. If income is intentionally unreported, accuracy-related penalties of 20% on the understated tax may apply. In extreme cases, civil fraud penalties of 75% of the underpaid tax could be imposed. Parents attempting to shift large amounts of investment income to their children to avoid higher tax rates may also face IRS scrutiny, leading to audits and potential legal consequences.