Does a minor have to report income? Children need to file tax returns (or their parents need to file returns for them), depending on the type and amount of income they receive. For example, if the child has a babysitting, dog walking or lawn mowing business that earns income, that is treated differently than income earned from investments that parents have set up for the child.
In addition, a child might need to pay employment tax (versus income tax), depending on where the income came from. Reviewing the different situations that trigger the need to file a tax return for a minor will help you make sure you meet your obligations.
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Consider also: Claiming Dependents for Your Taxes
Types of Income
If you meet with a tax professional to discuss your child's situation, one of the first things she'll do is ask about your child's income sources. You might have set up a trust fund, the child might have earned income from a small business, he might have stocks or bonds in his name that produced income or he might have been given a gift or inheritance.
These sources of income will be treated differently, so make sure you have the type and amounts of all income sources ready to discuss with your tax preparer (if you use one). If you are doing your child's taxes yourself, you'll still want to start with this list so you can visit the IRS website to see how each income source should be treated.
Consider also: What's Different About the 2021 Child Tax Credit?
Amount of Income
If a child has earned income greater than that year's standard deduction, the minor must pay taxes on the amount of income that's greater than the standard deduction – even if you claim the child as a dependent. Tax laws change frequently, so review this year's standard deduction. For example, in 2021, that amount was $12,550, and for 2022, it is $12,950. If your child earned more than $400, she might need to pay employment tax.
Earned vs. Unearned Income
Earned income comes from sources like a job (working for an employer) or self-employment (such as babysitting or yard care). Unearned income comes from sources like stock dividends or interest on investments.
If a child has more than $1,100 in unearned income, he needs to file a tax return. If a child has a combination of earned and unearned income, that total is called gross income. If gross income is greater than either $1,100 or earned income plus $350, he'll need to file a return. Refer to IRS publication 929 to learn more about how to calculate your tax liability on your child's income.
In some cases, parents can declare a child's unearned income on the parent's tax return. It's best to talk to your tax advisor about whether or not you qualify and how to handle this situation. Adding this income to your income might push you into a higher tax bracket, costing you more than if you had filed a return for your child.
Filing a separate return and declaring the child's income there might result in a lower tax rate on this income, because minors pay income tax at a lower rate than adults, according to NOLO.com.
Consider also: Form 1040: What You Need to Know
Benefits of Child Tax Returns
Children can benefit from filing tax returns while they're still minors in several ways. For example, you can qualify for the benefits of starting a retirement savings account for your child by filing taxes in her name. If the child had a part-time job and filled out a W-4, he might have had enough taxes taken out of his check during the year to qualify for a refund. Parents can avoid taxes and penalties on a dependent's income that wasn't properly declared, and qualify for certain tax credits.