Pub 929: Tax Rules for Dependents and Children Explained
Understand key tax rules for dependents and children, including income thresholds, deductions, and filing requirements, to ensure accurate tax reporting.
Tax rules for dependents and children can be complicated, particularly when determining whether a child must file a tax return or how their income is taxed. Parents and guardians need to understand these rules to avoid errors that could lead to penalties or missed deductions.
A dependent’s tax situation depends on their income type, filing thresholds, and special tax provisions like the Kiddie Tax. Knowing these details ensures compliance with IRS regulations and maximizes tax benefits.
Dependent Filing Thresholds
A dependent must file a tax return if their income exceeds certain limits, which the IRS adjusts annually for inflation. In 2024, a dependent must file if their earned income exceeds $14,600, unearned income surpasses $1,250, or total income is greater than the standard deduction for dependents.
If a dependent has both earned and unearned income, the filing requirement is based on the larger of $1,250 or earned income plus $400, up to the standard deduction limit. For example, a dependent with $13,000 in wages and $2,000 in investment income must file because their total income exceeds the standard deduction.
Some dependents must file regardless of income. Those with self-employment earnings over $400 must report income and pay Social Security and Medicare taxes. Dependents who had taxes withheld from wages and want a refund must also file. Additionally, those who received advance premium tax credits for health insurance must file to reconcile their credits.
Earned vs. Unearned Income
The IRS classifies income as either earned or unearned. Earned income includes wages, salaries, tips, and self-employment earnings—income from active work. It is subject to payroll taxes and may qualify for credits like the Earned Income Tax Credit (EITC), which can reduce tax liability or provide a refund.
Unearned income comes from passive sources such as interest, dividends, capital gains, and rental income. It does not qualify for the EITC and is often taxed differently. Long-term capital gains and qualified dividends are taxed at lower rates (0% to 20%, depending on total income), while interest income is taxed as ordinary income.
Investment income can create additional tax obligations. If a child has a custodial account generating interest or dividends, that income must be reported. If unearned income exceeds certain limits, it may be taxed at the parent’s rate. Parents can elect to report a child’s unearned income on their return using Form 8814, but only if the income is below $12,500 in 2024 and consists solely of interest and dividends.
Kiddie Tax Calculations
The Kiddie Tax applies to unearned income over $2,600 in 2024, preventing children from using lower tax brackets to shelter investment gains. This tax affects children under 18 and full-time students under 24 who do not provide more than half of their own financial support.
The first $1,250 of unearned income is tax-free due to the standard deduction. The next $1,250 is taxed at the child’s rate. Any amount over $2,600 is taxed at the parent’s marginal rate, which can be as high as 37%. For example, if a dependent earns $5,000 in investment income, the first $1,250 is not taxed, the next $1,250 is taxed at the child’s rate, and the remaining $2,500 is taxed at the parent’s rate.
IRS Form 8615 is used to calculate the Kiddie Tax. Parents must include their taxable income in the calculation, as the child’s tax rate is tied to theirs. Families with multiple children subject to this tax must complete a separate Form 8615 for each child.
Standard Deduction for Dependents
The standard deduction reduces taxable income. For dependents, the deduction is the greater of $1,250 or earned income plus $400, up to a maximum of $14,600 in 2024.
For example, a dependent earning $5,000 in wages receives a $5,400 deduction ($5,000 + $400), making their taxable income zero. If they earn $15,000, the deduction is capped at $14,600, leaving $400 taxable.
Documents for Claiming Dependents
Claiming a dependent requires documentation to verify relationship, residency, and financial support. The dependent’s Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) must be included on the tax return. Birth certificates, adoption papers, or guardianship documents may be needed to establish the relationship.
Residency can be verified through school records, medical records, or utility bills listing the dependent’s address. If a dependent qualifies under special circumstances, such as a foster child, additional documentation from a government agency may be necessary.
Financial support records are also important, especially when multiple individuals contribute to a dependent’s expenses. Bank statements, medical receipts, and education cost records help substantiate claims. In cases of divorced or separated parents, IRS Form 8332 may be required to transfer the right to claim the child to the non-custodial parent. Keeping organized records ensures compliance and prevents disputes with the IRS.
Special Filing Situations
Certain situations require dependents to file a tax return even if their income does not exceed standard thresholds.
Dependents who receive taxable distributions from a retirement account, such as an inherited IRA or early 401(k) withdrawal, must file. These withdrawals may also trigger a 10% penalty.
Scholarships and grants used for non-educational expenses, such as room and board, are considered taxable income and may require filing.
Self-employed dependents must file if net earnings exceed $400, as they are subject to self-employment tax. This applies to teenagers running small businesses, freelancing, or earning income through gig economy platforms.
Dependents who receive advance premium tax credits for health insurance must file to reconcile their credits and ensure they received the correct subsidy amount.