Does your child need to file a tax return?

As parents, we all try to do the responsible thing and put money away and/or create investment accounts for our children. A great thing is when the money starts making more money. Everyone likes that. As adults, we know we must report our money/income on our tax return. However, we really don’t think about a child having to file a tax return. Our thoughts tend to go to these questions: “But, our children don’t have to file a tax return because they’re not 18 yet, right? The money they make is free money, right?”

Many times, we see a child’s account make a few dollars of interest each year. Honestly, a tax return is not required for something small like this. However, if mom and dad established an investment account that produces a significant return on investment, whether through interest, dividends, proceeds, or a combination of all of the above, a tax return may be warranted for your child.

Something to keep in mind: If the child’s interest, dividends, and other unearned income total more than $2100.00, part of that income may be subject to tax at the parent’s tax rate instead of the child’s tax rate (kiddie tax).

To determine this tax, the form Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child’s tax return if the following criteria is met:

  • The child’s unearned income is over $2100.00
  • The child meets one of the following requirements:
    • The child is under the age of 18 at the end of the tax year
    • The child was age 18 but less than 19 at the end of the tax year and the child’s earned income did not exceed ½ of the child’s own support for the year (scholarships excluded)
    • The child was a full-time student who was at least 19, yet under the age of 24 at the end of the tax year and the child’s earned income did not exceed ½ of the child’s own support for the year (scholarships excluded)
  • At least one of the child’s parents was alive at the end of the year
  • The child is required to file a tax return for the tax year
  • The child does not file a joint return with a spouse for the tax year