Say your dependent child is earning money from working, investments, or both. Great, but beware—your child might have to file a tax return. It might seem odd, but the IRS says dependent children who earn more than a threshold amount must file returns.
If a child fails to file, you (the parent) might be liable for the tax. Moreover, if your child can't file a return for any reason, such as age, you're legally responsible for filing one on your child's behalf.
For all these reasons it's vitally important to know how much your dependent child can earn before a tax return has to be filed. But how much can a dependent child earn? Read on to find out.
Whether your child is required to file a tax return depends on the applicable standard deduction and how much earned and unearned income the child had during the year.
What is earned income? "Earned income" is income a child earns from working. It includes salary or wages, tips, professional fees, and taxable scholarship and fellowship grants.
What is unearned income? "Unearned income" is investment-type income. It includes taxable interest, dividends, capital gains, unemployment compensation, Social Security benefits, annuities, and distributions of unearned income from a trust.
A child who has only earned income must file a return only if the total is more than the standard deduction for the year. For 2022, the standard deduction for a dependent child is total earned income plus $400, up to a maximum of $12,950. So, a child can earn up to $12,950 without paying income tax.
A child who has only unearned income must file a return if the total is more than $1,150 for 2022.
However, if your child's interest and dividend income (including capital gain distributions) total less than $11,500, you can elect to include that income on your (the parents') return rather than file a return for the child. In this event, all income over $2,300 is taxed at your tax rates—you could end up paying more with this method.
If a child has both earned and unearned income, that child must file a return for 2022 if:
Even if your child doesn't meet any of the filing requirements discussed, that child should file a tax return if:
(1) income tax was withheld from that child's income, or
(2) that child qualifies for the earned income credit, additional child tax credit, health coverage tax credit, refundable credit for prior year minimum tax, first-time home buyer credit, adoption credit, or refundable American opportunity education credit.
See the tax return instructions to find out who qualifies for these credits. By filing a return, your child can get a refund.
The first $1,150 of unearned income is covered by the kiddie tax standard deduction, so it isn't taxed. The next $1,150 in unearned income is taxed at the child's tax rate, which is ordinarily lower than the parent's. Income over $2,300 is taxed at the parent's maximum income tax rate.
Figuring the kiddie tax can be complex. For example, if a parent has more than one child subject to the kiddie tax, the net unearned income of all the children has to be combined, and a single kiddie tax calculated.
For federal income tax purposes, the income a child receives for personal services (labor) is the child's, even if, under state law, the parent is entitled to and receives that income. So, dependent children pay income tax on their earned income at their own individual tax rates.
For more on tax rules for children, see IRS Publication 929, Tax Rules for Children and Dependents.