Taxes for Kids: Kiddie Tax and More
This article will give you an overview of kids and taxes so you know what your CPA or other tax professional is talking about. This is not intended to be advice specifically for you and your situation. Please consult a professional for specific advice.
As you are putting together your taxes you may wonder if your child also needs to file a tax return.
Following is a breakdown of when kids need to file taxes.
The first thing you need to determine is if their income is earned income or unearned income.
Earned income is when your child has worked for the money. This includes not only your regular part-time jobs that kids take but also self-employed income from things like modeling or their own business.
Unearned income is income from investments such as dividends, interest, and capital gains. Basically, any income that does not come from working and being employed, thus even rental property income would count as unearned if it was not a full-time business.
Once you know which type of income your child has you will be able to determine if they need to file a tax return.
If your child has an earned income of more than $6,200 for the year 2014 (this amount changes every year), they need to file an income tax return.
You may also want them to file a return if they earned below $6,200 and the employer took taxes out. If they file they will be able to get back those withholding since they do not have any taxes due.
If your child has investments and the income from those investments is more than $1,000 then they will need to file a return.
This is where it becomes trickier as they now fall into what is known as Kiddie Tax rules. The Kiddie Tax is a set of laws enacted in 1986 to stop parents from moving assets to their children to avoid paying taxes.
What the kiddie tax says is that for the first $1,000 of unearned income your child pays no tax. For the next $1,000, it is taxed at the child's rate. Anything above $2,000 is taxed at the parent's marginal tax rate. (Again these are 2014 numbers, and will adjust.)
Luckily, with this, you do have two options for filing taxes for your kids' unearned income.
The first is Form 8814 that is part of your tax return. Please note that this will impact your income levels and may impact deductions and credits.
The second option is their own return using form 8615.
You may want to run the numbers using both forms to determine what is best for you financially.
Extra Information on Kiddie Tax
There are some age guidelines for when the kiddie tax laws take effect on your child. These include:
- Any child under the age of 18.
- Under 18 and earned income is less than half or equal to half of their support.
- They are a full-time student between the ages of 19 and 23 and their earned income did not exceed half of their support, not including scholarships.
As a side note, the IRS calculates age different than most of us, so if your child is at one of the breakpoints in age, check with your adviser.