Do children have to file tax returns?

Your child pays no tax on the first $950 of unearned income and pays tax on the next $950 at his or her own (presumably 10%) tax rate. If your child receives annual unearned income of more than $1,900 and is under age 19, he or she will be liable for tax on amounts in excess of $1,900 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 19.

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

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 19 and has gross income of more than $950, 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 $9,500 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 $1,900 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 $950 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 $9,500 - 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 $5,700.

There are special tax rules that affect the tax on certain investment income of a child under age 19.