Does Your Kid Need to File a Tax Return?

Not many adults enjoy doing their income taxes, but have you ever considered whether your dependent child may actually be required to file their own return as well? If they do, you’ll probably want to help them because it’s a daunting task for anyone who’s never completed a tax return before – let alone a young person who likely has little experience with complex financial matters.

However, think of it as a great learning opportunity for your child as they’re introduced to the world of financial responsibility and the basics of how various sources of income are treated and taxed. Before you go down that road, let’s first find out if your kid even needs to file a tax return.

Criteria for filing a return

For the 2023 tax year, your dependent child will need to file if any of the following three criteria apply:

1. They have unearned income that exceeds $1,250
2. They have earned income that exceeds $13,850
3. They have gross income that exceeds the larger of:
   • $1,250 of unearned income; or
   • Their earned income up to $13,450, plus $400

For income tax purposes, the standard deduction is a specific dollar amount that can be applied to reduce how much of your income is subject to taxation. In the 2023 tax year, the standard deduction for dependent children is limited to the greater of:

• $1,250; or
• The dependent’s earned income for the year, plus $400

Please note that this deduction cannot exceed the regular standard deduction amount, which stands at $13,850 for single tax filers in the 2023 tax year.

Different types of income

Above, we have referenced the terms “unearned income,” “earned income” and “gross income.” It can be challenging for adults and children alike to distinguish among the three terms, so let’s define them here. What constitutes unearned income in the eyes of the IRS? Unearned income includes:

• Taxable interest, ordinary dividends and capital gains distributions
• Unemployment compensation
• Taxable social security benefits
• Pensions and annuities
• Distributions of unearned income from a trust

Please note that any amount of the child’s unearned income exceeding $2,500 is taxed at the parent’s tax rate. Earned income includes salary, wages, tips/gratuities and professional fees collected through self employment. Taxable scholarships and fellowship grants are also categorized as earned income. Gross income is simply the figure you arrive at when adding together unearned income and earned income.

Options for reporting your child’s unearned income

As the parent, you may elect to report a dependent child’s unearned income on your tax return. This election will simplify the process for your child because they won’t need to file their own return. If the child’s unearned income is $1,250 or less, then that amount is not taxable under this election.

To make the election, you’ll need Form 8814 – Parents’ Election to Report Child’s Interest and Dividends. If you’re making the election for more than one dependent child, you must file a Form 8814 for each child. In order for the parent to make an election, a child must meet all of the following six conditions:

1. They must be under the age of 19 (or under age 24 if a full-time student) at the end of 2023
2. Their only income came from interest and dividends, including capital gain distributions
3. Combined dividend and interest income for 2023 was less than $11,500
4. They would’ve been required to file their own 2023 tax return
5. They do not file a joint return for 2023
6. No estimated tax payments or federal income tax was withheld from the child’s income

Please note the IRS cautions in Form 8814 that federal income tax collected on your child’s income may be less if they file a separate tax return, rather than using this election to report their unearned income. The reason is, a parent can’t claim certain tax benefits that the child can on their own return. Also, claiming a child’s income on the parent’s return may push the parent into a higher tax bracket, so watch for that possibility. If your kid had income tax withheld from their paychecks, they could be entitled to a tax refund, so it might be advantageous to file a return even if their income landed below the thresholds for filing.

Be well prepared this income tax season. The following flowchart may help you determine whether or not your dependent child needs to file their own tax return. Of course, feel free to consult your Corient Wealth Advisor, tax or legal professional for personalized assistance related to your specific family situation.