How to File Your Child’s First Income Tax Return

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How to File Your Child’s First Income Tax Return

As your child moves toward adulthood, you face several milestone decisions that involve, in part, a desire to help your child become more independent and responsible. But one milestone for your child that you may not anticipate—even though it will be part of their growing-up experience—is filing that firstincome tax return.

Key Takeaways

  • Because most children do not get education in school about filing income taxes, parents should educate their children when and how to do so.
  • Dependents who have earned or unearned income must file under specified conditions.
  • Other reasons for filing include owing taxes, recovering withheld taxes, receiving Social Security credits, qualifying for an earned income credit, and establishing a retirement account.
  • Under some conditions, such as having just unearned income, your kid may be able to avoid filing a separate tax return and instead put their income on your return (interest, dividends, or capital gains).

Despite the fact that the Internal Revenue Service (IRS) has an entire webpage dedicated to educators, most children are not taught how to pay taxes in school (titled Understanding Taxes).

The reasons for this range from underfunding and a lack of student enthusiasm to a general failure of the educational system to recognize skills that students need.

Most youngsters have just a hazy understanding of income taxes, much alone the detailed procedures that must be followed. It is your responsibility as a parent to assist your kid in initiating this rite of passage by reviewing tax-filing requirements and/or seeking advice from tax specialists.

This fast guide for parents covers the fundamental guidelines for deciding when your kid must (or should) file. It also suggests ways to assist your youngster accept responsibility for their own tax responsibilities in the future.

Dependent Child Status

To qualify as your dependent, your child must:

  • You must have a valid Social Security number (SSN)
  • Do not file a combined tax return (if married)
  • Be your adopted kid, stepchild, eligible foster child, sibling, half-sibling, step-sibling, or offspring of any of these.
  • Be under the age of 19 at the conclusion of the tax year, under the age of 24 if you are a full-time student, or any age if you are permanently and completely incapacitated.
  • In the United States, live with you for more than half the year.

Personal exemptions for parents and those with dependents were repealed with the passing of the Tax Cuts and Jobs Act (TCJA) in 2017.

Several additional tax-saving alternatives, though, exist. These are some examples:

When Your Child Must File a Tax Return

Some individuals wrongly feel that since their kid is a dependant, they do not have to pay taxes. However, depending on the circumstances, your kid may be required to file an income tax return. For the 2021 tax year, a kid who fits any of the following criteria must file:

  • If the child’s sole source of income is unearned income (e.g., investment interest or profits) exceeding $1,100 (rising to $1,150 in 2022),
  • If the child’s sole source of income is more than $12,550 (which will rise to $12,950 in 2022),
  • If the child has both earned and unearned income, and the child’s gross income (earned plus unearned) exceeds $12,550 or their earned income plus $350, whichever is less (which essentially means a dependent child must file if their unearned income exceeds $350 and they have any earned income, though there is a minimum threshold of $1,100 gross income).
  • The child’s net earnings from self-employment are at least $400.
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Additional requirements apply to blind children, children who owe Social Security and Medicare taxes on tips not reported to an employer, pay received from an employer who did not withhold taxes, or children who get wages from churches that are exempt from employer Social Security and Medicare taxes.

If the first condition above requires filing a return and the kid has no other income other than unearned income, you may avoid filing a separate tax return for your child by making an election outlined later in this article.

When Your Child Should File a Tax Return

Even though your kid is not obliged to file an income tax return, filing is still a good idea if:

  • Earnings were subject to income tax withholding.
  • They are eligible for the earned income tax credit.
  • They must pay recapture taxes (such as the tax from recapture of an education creditor)
  • They want to open an IRA
  • You want your youngster to have the educational experience of tax preparation.

The major purpose for submitting in the first two circumstances would be to receive a refund if one is payable. Others are income-dependent or based on seizing a chance to start saving for retirement or learning about personal finance.

Filing to Recover Taxes Withheld

Some businesses automatically withdraw a portion of their employees’ wages for income taxes. Children who do not plan to incur any income tax (and did not owe income tax the previous filing year) might obtain an exemption by submitting Form W-4 in advance.

As a consequence of the Tax Cuts and Jobs Act, Form 1040EZ, which was formerly used for simplified individual taxes, is no longer acceptable for tax years 2018 and beyond.

Filing to Report Self-employment Income

To calculate profit, your kid may use Form 1040 and Schedule C to record self-employment income (as with Form 1040EZ, Schedule C-EZ is no longer used.)If your kid earns $400 or more through self-employment, or a lesser level of $108.28 if they work for a church or religious organization that is free from employer Social Security and Medicare taxes, they must file a tax return.

Schedule SE may be used to establish if your kid pays self-employment taxes (basically, Social Security and Medicare taxes for self-employed individuals). Even if no income tax is owing, your kid may be required to pay self-employment taxes of 15.3%.

Filing to Earn Social Security Work Credits

When children earn enough money, submit the necessary tax forms, and pay Federal Insurance Contributions Act (FICA) or self-employment taxes, they may begin accumulating labor credits toward future Social Security and Medicare benefits. For the tax year 2021, your kid must earn $1,470 (which will rise to $1,510 in 2022). They may only get four credits each year.

If your child’s earnings come from a covered employment, the FICA tax will be deducted automatically from their paycheck. If your kid earns money via self-employment, he or she must pay self-employment taxes on a quarterly or annual basis.

Filing to Open an Individual Retirement Account (IRA)

It may seem that your kid is too young to start an individual retirement account (IRA), but it is totally legal if they have earned money. Earned income may also come from a job as an employee or through self-employment.

Consider matching your child’s contributions to an IRA if you can afford it. The total contribution cannot exceed the child’s entire earnings for the year. This allows your youngster to begin saving for retirement while keeping more of their own earnings.

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It also educates kids about matching funds, which they may confront later if their employer offers a 401(k). If the kid qualifies, it makes sense for them to form a Roth IRA and begin benefiting from decades of compound interest before retirement, as well as tax-free withdrawals when they do retire.

Filing for Educational Purposes

Filing income taxes may educate youngsters about the U.S. tax system while also establishing good filing practices for later in life. As previously said, it may also assist youngsters in beginning to save money or receive rewards for the future.

Even if your kid does not qualify for a refund, does not earn enough to qualify for a Social Security credit, and does not want to start a retirement account, understanding how the tax system works is useful.

Helping Your Child File a Tax Return

When it comes to assisting your kid in filing their income taxes, you should be aware of the following:

  • Your kid is legally responsible for submitting and signing their own income tax returns. This obligation may begin at any age, sometimes even before your kid is old enough to vote.
  • “If a kid cannot file his or her own return for whatever reason, such as age,” according to IRS Publication 929, “the child’s parent, guardian, or another legally responsible person must submit it for the child.”
  • Your kid may be sent with a tax shortfall notice and perhaps beaudited. If this occurs, you must promptly tell the IRS that the activity involves a kid.
  • “The IRS will endeavor to address the situation with the parent(s) or guardian(s) of the child consistent with their authority,” according to IRS Publication 929.

Reporting Your Child’s Income on Your Tax Return

Your kid may be able to avoid filing a separate tax return by including their income on your return if and only if:

  • Your child’s sole source of income is interest, dividends, and capital gains (unearned income).
  • At the conclusion of the year, your kid was under the age of 19 (or under the age of 24 if a full-time student).
  • The gross income of your kid was less than $11,000.
  • For the tax year, your kid does not file a joint return.
  • There were no anticipated tax payments for the year, and no overpayments from the previous year (or any modified return) were applied to this year in your child’s name and Social Security number.
  • Under the backup withholding regulations, no federal income tax was withheld from your child’s earnings.
  • You are the parent whose return must be utilized for applying the child tax regulations.

Explain to your kid the fundamentals of Social Security and Medicare, as well as the advantages of accruing credits in these programs.

Use IRS Form 8814 to report your child’s unearned income on your tax return. It is crucial to know that doing so may result in you paying a greater tax rate than if the youngster filed their own tax return. It all depends on how much unearned income your kid declares.

Teaching Your Child About Taxes

Start discussing about taxes as soon as your kid begins earning their own money.

  • Examine your first pay stub. Discuss gross earnings, any income tax deductions, and any FICA tax deductions (Social Security and Medicare).
  • Tell your kid that, depending on their total income for the year, they may be eligible for a refund of withheld income taxes, but that FICA deductions will not be repaid and will continue to be deducted from earned earnings.
  • This is also an excellent moment to go over the fundamentals of Social Security and Medicare, as well as the advantages of earning credits in these programs.
  • If it seems like your child’s self-employment income may surpass $400, have the same conversation about the procedure and the many forms they may need to submit, as well as the necessity to preserve spending receipts and why.
  • Explain that every income tax form requires two pieces of information: the taxpayer’s name and tax identification number (TIN) (usually theSocial Security numberfor children).Remind your kid not to use aliases on tax returns since the IRS needs these two elements to match the data it has on file.
  • Stress that tax returns are generally due by April 15 of each year, but that they may file sooner if they are prepared and have all of the required evidence. The IRS usually starts taking returns in late January.
  • Make sure your youngster knows that tax data are private and should not be left exposed to curious eyes.
  • If your kid is able, encourage them to sign their own tax return and documents. Remind them that they are signing under the “penalty of perjury,” which means they will be lying under oath if their return is not honest.
  • Remind people of the significance of paying attention to their taxes, filing on time, and taking their IRS duties seriously.
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What Is the Child Tax Credit for 2021?

According to the American Rescue Plan, the Child Tax Credit for 2021 has been increased to $3,600 per eligible dependant in 2021. Certain income restrictions must be satisfied in order to obtain the credit.

Do Minors Have to File Taxes?

Minors must pay taxes if their earned income exceeds $12,550 (this amount will rise to $12,950 in 2022). If your kid has just unearned income, the barrier is $1,100 (which will rise to $1,150 in 2022). It is the larger of $1,100 or their earned income + $350 if they have both earned and unearned income. If the minor is self-employed, they must pay self-employment tax on earnings of $400 or more.

What Is the Standard Deduction for a Child?

The standard deduction for dependents in 2021 is the greater of $1,100 or your earned income plus $350. The sum cannot be more than your filing status’s basic standard deduction.

The Bottom Line

It is your responsibility as a parent or guardian to discuss and educate your kid about income tax filing. The best way to do this is to begin early, be patient, and gently guide your kid through the process. Explain as much as you need to, but don’t feel obligated to cover every nook and cranny of tax law. After all, even seasoned taxpayers may find it difficult. Finally, if you get stuck, seek the advice of a tax specialist.

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