How Much Money Can a Child Earn Before Paying Taxes?
Unravel the complexities of child income and taxes. Learn when your child's earnings are taxable and how to manage their tax obligations.
Understanding how a child’s earnings affect their tax obligations is an important financial consideration for many families. While children might seem exempt from tax responsibilities, specific Internal Revenue Service (IRS) rules dictate when their income becomes taxable and a tax return is necessary. This article provides clarity on the types of income children commonly receive, the amounts that trigger a tax filing requirement, and the special tax rules that may apply.
Understanding Child Income
Income a child earns can be categorized into two main types: earned income and unearned income. Earned income results from services performed, much like an adult’s salary or wages.
Examples of earned income include wages received from a part-time job, earnings from babysitting, mowing lawns, or income generated through a self-employment venture, such as selling crafts or providing online services. Taxable scholarships and fellowship grants can also fall under the umbrella of earned income. This category of income is typically reported on a Form W-2 from an employer or a Schedule C if the child is self-employed.
Unearned income, conversely, comes from investments or assets rather than from work performed. This can include interest earned from a savings account or bonds, dividends from stocks, capital gains from the sale of investments, rents, royalties, and distributions from trusts.
Income Thresholds for Taxability
Whether a child needs to file a tax return largely depends on the amount and type of income they receive. For the 2024 tax year, specific thresholds determine if a filing requirement exists.
If a child’s income consists solely of earned income, they must file a tax return if their gross income exceeds the standard deduction amount for a dependent. For 2024, this threshold is $14,600. For example, if a child earned $15,000 from a summer job and had no other income, they would need to file a tax return.
Rules differ for unearned income. A child with only unearned income must file a tax return if that income exceeds $1,300 for 2024. This is due to different tax treatments, including the potential application of the “Kiddie Tax.”
When a child has both earned and unearned income, the filing requirement is triggered if their gross income is more than the larger of two amounts: $1,300, or their earned income plus $450. However, the total standard deduction for a dependent cannot exceed the basic standard deduction for a single filer, which is $14,600 for 2024.
The Kiddie Tax
The “Kiddie Tax” is a specific tax rule designed to prevent parents from reducing their tax liability by transferring investment assets to their children. This tax applies to a portion of a child’s unearned income that exceeds certain thresholds, taxing it at the parents’ marginal income tax rate.
For the 2024 tax year, the Kiddie Tax applies to a child’s unearned income that is greater than $2,600. The first $1,300 of a child’s unearned income is generally tax-free due to the standard deduction for dependents. The next $1,300 of unearned income is taxed at the child’s own tax rate. Any unearned income above this $2,600 threshold is then subject to the parents’ marginal tax rate.
The Kiddie Tax applies to children who meet specific age and support criteria. Generally, it applies if the child was under age 18 at the end of the tax year. It can also apply if the child was age 18 at the end of the tax year and did not have earned income that was more than half of their support. It may also apply to full-time students aged 19 through 23 whose earned income did not exceed half of their support for the year.
Filing Tax Returns for Children
Typically, the child’s parent or legal guardian is responsible for preparing and signing the tax return on the child’s behalf. If the child is unable to sign, the parent or guardian should sign the child’s name, followed by “by [Your Signature], Parent (or Guardian) for minor child.”
The primary form for reporting a child’s income is Form 1040, U.S. Individual Income Tax Return. If the Kiddie Tax applies due to significant unearned income, Form 8615, Tax for Certain Children Who Have Unearned Income, 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.
In some situations, parents may elect to include their child’s interest and dividend income on their own tax return, which can simplify filing by avoiding a separate return for the child. This election is made using Form 8814, Parents’ Election to Report Child’s Interest and Dividends. This option is generally available if the child’s gross income is less than $13,000 for 2024, their only income is from interest and dividends, and other conditions are met. However, utilizing Form 8814 may increase the parents’ adjusted gross income, potentially affecting other tax deductions or credits.