Do children have to file tax returns?

A tax return usually must be filed for a child whose income included investment income, such as interest and dividends, and totals more than $750.

Your child pays no tax on the first $750 of unearned income and pays tax on the next $750 at his or her own (presumably 10%) tax rate. If your child receives annual unearned income of more than $1,500 and is under age 18, he or she will be liable for tax on amounts in excess of $1,500 at your maximum marginal tax rate. This tax rule, commonly referred to as the "kiddie tax", reduces the appeal of shifting income producing property to children under age 18.

The table below shows why it may be beneficial to shift some taxable investment income to your children.

Tax Savings on Investment Income
(Parent's marginal tax rate: 35%)
Amount of
Taxable Income
  
Parent's
tax

Child under 14's tax

Child 14
or older's tax

First $750 $750.00 $750.00 $750.00
Tax ($262.50) 0.00 0.00
Net income $487.50 $750.00 $750.00
Next $750 $750.00 $750.00 $750.00
Tax ($262.50) ($75.00) ($75.00)
Net income $487.50 $675.00 $675.00
Total Net income $975.00 $1,425.00 $1,425.00

Net tax savings: $450.00

A minor child is a taxpayer in his/her own right. If the tax laws require the child to file a tax return but he/she is unable to file the tax return for any reason the parent or guardian is required to file the tax return. If the child cannot sign the tax return the parent should sign the child's name on the tax return followed by "by [parent's signature], parent for minor child".

If your child is under 18 and has gross income of more than $750, consider electing to include your child's tax liability on your tax return. This option is available if your child's gross income is comprised only of interest and dividends totaling $7,500 or less, no estimated tax payments are made for the tax year, and the child is not subject to backup tax withholding. Making this election requires including your child's gross income in excess of $1,500 for the tax year on your tax return.

For each child for whom this tax election is made, an added tax equal to the lesser of $75.00 or 10%  of the excess of your child's income over $750 is owed on your tax return. Your child's holdings are not depleted by paying tax, and the cost of preparing an additional tax return is avoided.

Including your child's investment income on your tax return may allow you to deduct more investment interest expense - up to $7,500 - because of the addition of your child's investment income on your tax return. This could effectively shelter a portion of the child's income from tax on your tax return.

But be careful. The additional income could reduce available itemized tax deductions on your tax return that are tax deductible based on a percentage of Adjusted Gross Income. Additionally, the election could increase your state income tax liability on your state tax return.

If your child has only earned income and no investment income an IRS tax return must be filed if the child's income is more than $5,150.

There are special tax rules that affect the tax on certain investment income of a child under age 18.

Related tax information about child tax returns and "kiddie tax"
Tax Directory Topics:
Student Tax Returns
Dependent Tax Issues
IRS publications about children tax returns and "kiddie tax":
For more details, see Tax Topic 351, Who Must File; Tax Topic 553, Tax On A Child's Investment Income; IRS Publication 929, Tax Rules for Children and Dependents; and IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Also see IRS Publication 17, Your Federal Income Tax. Please read this IMPORTANT Editor's Note regarding navigating IRS publications with Adobe Acrobat Reader.
IRS publications can also be ordered by calling 1-800-829-3676.
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