Does My Child Need to File a Tax Return?

Your teenager may have had their first job working at the snack shack last summer, and their W2 just arrived in the mail.  Or perhaps you collectively decided to sell some of the gifted Microsoft stock from their custodial account so your teenager could purchase their first car.  Now you’ve received a 1099 and wonder if your child needs to file their own tax return.  We’re here to shed some light on the most common situations in which your dependent child will need to file their own tax return.

A Summer Job or Internship If Paid Over $12,550

If an employer pays your child more than $12,550 (2021 threshold) and you typically claim your child as a dependent on your tax return, your child is required to file their own tax return.

Your child is considered a dependent if they 1) reside with you for more than half the year, 2) provide less than half of their own financial support, and 3) are under the age of 19 at all times during the tax year, or under the age of 24 if a full-time student.  If your child is attending college, you may still claim them as a dependent even though your child does not physically live with you during the year.

The income threshold of $12,550 only applies to “earned income,” which means income generated through a job.

Investment Income Over $1,100

What if your child didn’t have earned income, but instead had significant investment income (the IRS calls this “unearned income”) such as interest and dividends?    We see this situation often — where a parent or grandparent gifts stocks to children.  It’s a great way to introduce them to investing and give a gift that grows over time.  Income from investments in a child’s name (or in a custodial account designed for a minor) is considered “unearned income.”  This includes interest, dividends, and capital gains from the sale of stocks, bonds, or other securities.  If unearned income exceeds $1,100 (2021 threshold), then your child is required to file an income tax return.  If your child is under the age of 19 (or under the age of 24 if a full-time student), you may elect to report your child’s investment income on your return to avoid your child having to file a separate return.  However, if your child’s unearned income exceeds $11,000, they must file their own tax return.

A More Complex Combination of Earned and Unearned Income

The filing requirements are pretty straightforward if you only have earned income or unearned income.  But what if your child has a combination of both?  In this instance, the income thresholds for filing are lower.  For example, if your child has more than $750 of earned income and over $350 of investment income, then they are required to file an income tax return.

The IRS has a worksheet that can be helpful in determining whether a dependent with earned and unearned income is required to file a tax return.

The IRS website has an online interactive tool that can be helpful in determining if filing a return is needed.

Other Instances Where Your Child May Want To File A Tax Return

Refund or Tax Credit Eligibility: Even if earned income falls below the filling threshold, if the employer withheld taxes, your child may want to file a return as they could be eligible for a refund.  If your child qualifies for any tax credits, this may be another reason your child would want to file a return (although most tax credits require that you are not claimed as a dependent).

IRA Contributions: If your child makes a deductible IRA contribution with their earned income, this will require filing a tax return.  However, contributions to a Roth IRA are excluded from this rule and would not require filing a tax return. We encourage most young savers to start a Roth IRA so they can benefit from tax-free growth over time.  Keep in mind your child can only make an IRA contribution up to the amount of their earned income with a maximum contribution limit of $6,000 per year (2022 limit).

Independent Children: If you don’t claim your child as a dependent on your tax return, they must file if their taxable income exceeds $12,550 from all sources (earned or unearned).

If you have any questions, please reach out to your Coldstream wealth management team.

Additional Resources

• IRS Publication 501