Is Your Child's Income Taxable?

During the summer, teenagers make up a significant part of the workforce. Most states allow children to work as early as 14 years of age, providing they have a work permit and follow the rules of limitation.

Any person, regardless of age, that has earned income is subject to the same filing requirements set by the IRS. Many parents that have dependent children are unsure how to file the income their child earns.

Each taxpayer is responsible for reporting and paying the taxes on their own earned income, and will receive a Form W-2 from their employer. Parents are not required to include the amounts reported on a dependent’s W-2 as part of their own income when filing tax returns. Instead, the dependent may be required to file a separate return. There is no age limit for filing a tax return as a primary taxpayer.

For the 2010 tax year, a single person under 65 years old who is not blind with earned income of $5,700 is required to file. This is a combination of the standard deduction and personal exemption that all taxpayers are entitled to before taxes are calculated. The tricky part is the personal exemption. There is only one per person, and it can only be claimed on one tax return. The amount of wages your child earns will determine whether it is beneficial for the parent or the child to claim their exemption. Making the right choice and filing at the same time as your child can reduce the chances of making a major mistake on your tax return that would require an amendment. Typically, a child will file a return and claim their exemption not realizing that this will affect the parents tax return. Once the child files electronically, the parents have to file a paper return to correct it, and the refund is delayed by as much as 12 weeks. The difference on the parents tax return could exceed $1,000.

If the amount the dependent earned is less than $5,700, a tax return does not need to be filed. However, if federal and state taxes are withheld, it is a good idea to file a return to claim the refund of taxes withheld. If the amount earned exceeds $5,700, a tax return must be filed to calculate the tax liability.

If all this seems confusing PRO-TAX can help you prepare your tax return as well as those of your dependents.

The Tax on children’s unearned income (interest, dividends, etc…) has a different set of rules that are beyond this article, and PRO-TAX can help with that too!

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