How Much Can a Child Make Before Paying Taxes?
Navigate the nuances of child income and tax obligations. Understand when and how minors' earnings affect their financial responsibilities.
Children, like adults, may have federal income tax obligations depending on the amount and type of income they receive. The Internal Revenue Service (IRS) does not exempt individuals from filing requirements based solely on age, even if a child is claimed as a dependent on a parent’s tax return. This guide clarifies the conditions under which a child’s income becomes taxable and when a tax return must be filed.
Income Thresholds for Children
A dependent child must file a tax return if their income surpasses certain thresholds, which vary based on whether the income is earned, unearned, or a combination of both. For the 2024 tax year, a dependent child with only earned income must file a return if that income exceeds $14,600. This amount aligns with the standard deduction for single filers. If a dependent child has only unearned income, a tax return is required if that income is more than $1,300 for the 2024 tax year. These thresholds are subject to annual adjustments by the IRS.
When a dependent child has both earned and unearned income, the filing requirement is triggered if their gross income exceeds the greater of $1,300, or their earned income up to $14,150 plus $450. For example, if a child earns $5,000 from a part-time job and receives $400 in interest, their total income of $5,400 is less than $5,000 + $450 = $5,450, so they would not need to file based on this combined income rule.
Defining Earned and Unearned Income
The distinction between earned and unearned income is fundamental to determining a child’s tax obligations, as different thresholds and tax rules apply to each type. Earned income is money received for services performed, such as wages, salaries, tips, or income from self-employment activities like babysitting or lawn mowing. This also includes taxable scholarships and fellowship grants reported on a Form W-2.
Unearned income is income derived from passive sources, not from active work or services. Common examples include interest earned from savings accounts, dividends from stocks, capital gains from the sale of investments, and income distributed from trusts. Rent and royalty income, as well as unemployment compensation, also fall under the category of unearned income. This distinction is important because earned income is generally taxed at the child’s own tax rate. Unearned income, however, can be subject to different rules, such as the “Kiddie Tax,” which may result in it being taxed at the parent’s marginal tax rate once certain thresholds are met.
Understanding the Kiddie Tax
The Kiddie Tax is a specific provision designed to prevent parents from reducing their tax liability by shifting investment income to their children, who might otherwise be in a lower tax bracket. For the 2024 tax year, the first $1,300 of a child’s unearned income is tax-free. The next $1,300 of unearned income is taxed at the child’s own tax rate. Any unearned income exceeding $2,600 for 2024 is then subject to the Kiddie Tax and is taxed at the parent’s marginal income tax rate.
The Kiddie Tax generally applies to children who are under 18 years old at the end of the tax year. It also applies to 18-year-olds whose earned income does not exceed half of their support for the year, and to full-time students aged 19 through 23 whose earned income also does not exceed half of their support. IRS Form 8615 is used to calculate the Kiddie Tax. This form identifies the child’s net unearned income subject to the tax and calculates the amount owed based on the parent’s tax rate.
When a Child Needs to File a Tax Return
A child is generally required to file a federal income tax return if their income surpasses the thresholds outlined earlier. Even if a child’s income does not meet these mandatory filing thresholds, it can still be beneficial for them to file a tax return in certain situations. If federal income tax was withheld from their wages, filing a return is the only way to receive a refund of that withheld tax. Similarly, if the child qualifies for a refundable tax credit, such as the Additional Child Tax Credit, filing a return is necessary to claim it.
Parents have an option to include a child’s unearned income on their own tax return by filing IRS Form 8814. This election can simplify the filing process by avoiding a separate return for the child, but it is only available if the child’s sole income is from interest and dividends, and their gross income is less than $13,000 for 2024.