Taxing Children

Your child got a job—great. They will have some pocket money and perhaps stop coming to the Bank of Their Parents. In addition to having extra cash on hand, they may have to share some of these dollars with their uncle, Uncle Sam. However, before they start spending their hard-earned monies you should sit them down and explain some of the facts of life such as the difference between gross salary vs. net and who FICA is.

Oh, and yes, they may have to start filling out a tax return.

How do you know if your child is required to file a tax return? While it can vary, here are some general guidelines:

• If earned income is more than $5,700
• If unearned income (investment income) is more than $950
• If gross income (both earned and unearned) was more than the larger of $950 or their earned income (up to $5,400) plus $300.

Another scenario that may result in taxing your kids is investments that they or family members have made in their name. Or, perhaps your child has been bitten by the entrepreneurial bug. That’s great. But, they will have to file a 2010 tax return if their net earnings from self employment or their own business is $400 or more.

Example:  Greg is 13 and you claim him as a dependent on your tax return. When his lawn mowing business just started last year, Greg was only making $300 but word got around and he soon got referrals. This year, Greg is raking in $600. After paying for gas and other expenses from his lawn mowing service, Greg earned $500. Since he passed the $400 threshold, Greg needs to file an income tax return.

How to file your child’s tax return:

Most teens are likely to get back the monies deducted for income taxes when they file their tax returns; however, they can kiss their FICA taxes goodbye. You can explain that FICA is the part of a worker's pay that is withheld for Social Security and they may see the monies again, but later, much later.

If your child is an employee, or owns their own business, a tax return must be filed in their name. Entrepreneurs will need to complete a Schedule C in addition to their 1040 income tax form. If business expenses are less than $5,000, they had no employees, and no home office deduction then Schedule C-EZ should suffice.

For those kids with only investment income, parents can most likely report the income on their tax return. This would cut down on the number of tax returns filed.