What are the requirements to file for investment income? Tax must be figured using the parents’ rates if a child’s investment income is more than $1,900 and meets one of three age requirements;
-under age 18 at the end of the year
-age 18 at the end of the year, did not have earned income that was more than half of his or her support
-full-time student over age 18 and under age 24 at the end of the year, did not have earned income more than half of his or her support
To figure your child's tax using your rate, fill out Form 8615,“Tax for Certain Children Who Have Investment Income of More Than $1,900,” and attach it to your child's federal income tax return.
And when certain conditions are met, you may be able to avoid having to file a tax return for your child by including the income on your tax return. In this situation, see Form 8814 and Parent's Election to Report Child's Interest and Dividends in Publication 929.
But keep in mind that when you add your child's income to your return, that extra money could mean the loss (or at least a reduced benefit) of some tax deductions and credits that are phased out as income grows. You should run the numbers on Form 8615 and Form 8814 to guarantee that you, and your child, pay the least possible tax on the investment earnings. If you have more than one child with unearned income, you must repeat this process for each child.
What if my child has a summer job and investment income? For a qualifying dependent child, any one of the situations below will require a federal income tax return to be filed;
Filing to recover taxes withheld. Some employers may automatically withhold part of pay for income taxes. By filing Form W-4 in advance of withholding, those who do not expect to owe any income tax can request that employers not withhold. But if the employer has already withheld taxes, file a return to get the taxes back from the IRS.
Are there other reasons to file? Yes, if self-employed and earned more than $400 or if Social Security or Medicare tax owed on tips is not reported to your employer. Remember, if a filing is required for investment income and there is no other income except unearned income, parents can avoid a separate filing by making an election to include the tax on their return.
Earned money from mowing lawns is a form of self-employment. While this type of work usually involves cash payments and does not require filing a tax return unless net profit from self-employment is $400 or more, it might be a good idea to report self-employment income, for two reasons;
Earning Social Security work credits - Children can begin earnings work credits toward future Social Security and Medicare benefits when they earn a sufficient amount of money, file the appropriate tax returns, and pay FICA or self-employment tax.
Start an IRA - By declaring self-employment income, your child becomes eligible to start a Traditional or Roth IRA and contribute up to 100% of net income from self-employment.
Who should file the return? The answer to this question is really up to you, as a parent. Interestingly, there are no official age guidelines defining who can sign and file a tax return. If your child is able to understand the instructions, and fill out the return, then by all means, have them do so. This can be an excellent opportunity to teach your kids about money management and the process of filing taxes. Just remember, they will be responsible for any penalties that might occur. If a child is too
young to handle this kind of responsibility, then you, as parent or guardian, will be expected to complete the form for them. If your child isn’t old enough to sign their own return, you should complete it, sign their name for them, and add “By (your name), parent (or guardian) for minor child.”
Filing can be educational. Filing income taxes can teach your child how the U.S. tax system works while helping them create sound filing habits early in life. In some cases, it also can help children start saving money or earning benefits for the future.
Ideas to communicate. Their first paycheck stub. It will show gross earnings, any deductions for income taxes and any deductions for FICA taxes (Social Security and Medicare). Explain that they will probably receive a refund of any income taxes withheld, but the FICA deductions won't be refunded, and they will continue for every paycheck the child receives, at any age. This is a good time to explain the basics of Social Security and Medicare and the benefits of earning credits in these programs.
Earning a paycheck can be a rewarding experience for your child-unless caught off-guard by the tax withholdings. You can minimize potential disappointments by helping him understand his role as a U.S. taxpayer. Generally, all citizens and residents must pay taxes to fund local, state and federal governments. Employers assist in this effort by withholding money from wages to cover each employee's tax liability.
Explain that two pieces of information are required on every income tax form; the taxpayer's name and tax identification number. The IRS wants these two items to match the data it has on file, and problems will arise if there is a discrepancy. Emphasize that individual income tax returns are due by April 15, but there is no penalty for filing earlier, and doing so generally is a good habit.
Point out that tax returns contain confidential information that should be protected from prying eyes. Set a good example by filing away completed returns and copies in a secure place. Explain that the signature attests to the form's truth, accuracy and completeness under penalty of perjury. Emphasize that perjury means "telling a lie under oath" to emphasize the need for honesty in filing taxes. Reinforce the importance of paying attention to taxes, filing on time and taking IRS obligations seriously.
You might not think much about it, but filing taxes will be part of almost every child's ‘growing-up’ experience. Since income tax filing is not taught in schools and it's not a captivating subject, many have only a vague idea of what income taxes are, let alone the specific rules they are required to meet. A parent’s role should be as a guide. The best way is to start teaching early, and walk them through the process the first few times. Fully explain the reasons for each action they are taking - and if you don't know the answer to their questions, make sure to talk to a professional who does. They may not want to admit it, but your children will need your help in understanding how income taxes work.