When do children pay taxes?
Many parents and guardians wonder if their children need to pay taxes and when that responsibility begins. The rules around children and taxes can seem confusing, but understanding them is important for families managing finances and teaching kids about money. This post explains when children must pay taxes, what income counts, and how parents can help their children navigate tax obligations.
When do children have to file taxes?
Children must file a tax return if their income exceeds certain thresholds set by the tax authorities. These thresholds depend on the type of income and the child's age. The main types of income for children include earned income, such as wages from a part-time job, and unearned income, such as interest, dividends, or investment earnings.
Earned income thresholds
For children under 18, the filing requirement usually starts when their earned income exceeds the standard deduction for a single filer. For example, in the United States for the 2023 tax year, the standard deduction is $13,850. If a child earns more than this amount from a job, they must file a tax return.
Unearned income thresholds
Unearned income has a lower threshold. If a child's unearned income exceeds $1,250, they generally need to file a tax return. This rule exists to prevent parents from shifting investment income to their children to reduce the family’s overall tax burden.
Special rules for children under 19 or full-time students under 24
Children under 19, or full-time students under 24, who have both earned and unearned income may face different filing requirements. For example, if their unearned income is over $1,250 and their earned income plus $400 exceeds the standard deduction, they must file.
What types of income do children pay taxes on?
Children pay taxes on both earned and unearned income, but the tax rates and rules can differ.
Earned income includes wages, salaries, tips, and self-employment income.
Unearned income includes interest, dividends, capital gains, and investment income.
Parents should be aware that investment income above certain limits may be taxed at the parents’ tax rate under the "kiddie tax" rules. This prevents families from avoiding taxes by transferring investments to children in lower tax brackets.
How do parents help children with taxes?
Parents can support their children by:
Keeping accurate records of all income earned or received.
Helping prepare tax returns or hiring a tax professional if needed.
Teaching children about tax responsibilities and the importance of filing correctly.
Using tax software designed for beginners to make the process easier.
Parents should also be aware of tax credits and deductions that may apply to their children, such as the Earned Income Tax Credit (EITC) for working children with low to moderate income.
Examples of when children pay taxes
Here are some practical examples to clarify when children must pay taxes:
Part-time job earnings: A 16-year-old working at a local store earns $15,000 in a year. Since this exceeds the standard deduction, they must file a tax return and may owe income tax.
Investment income: A 14-year-old receives $2,000 in dividends from stocks. Because this unearned income is above $1,250, they must file a tax return and may be subject to kiddie tax rules.
Combination of incomes: An 18-year-old college student earns $5,000 from a summer job and $2,000 in interest from a savings account. They must file a tax return because their unearned income exceeds $1,250 and their total income surpasses the filing threshold.
What happens if children don’t file taxes when required?
Failing to file a tax return when required can lead to penalties and interest on any taxes owed. It can also cause problems with future financial activities, such as applying for student loans or financial aid. Filing taxes on time helps children build a good financial record early in life.
Final thoughts on children and taxes
Children must pay taxes when their income exceeds specific limits, whether from work or investments. Parents play a key role in helping children understand these rules and meet their tax responsibilities. Early education about taxes can prepare children for managing their finances confidently as adults.
If your child earns income, review the current tax thresholds and filing requirements. Consider consulting a tax professional to ensure compliance and to take advantage of any credits or deductions available. Teaching children about taxes is an important step toward financial literacy and responsibility.
Comments