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Whenchildrenmustfiletaxreturns,howtohelpreducetaxesoninvestments,and
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93% whovotedfoundthishelpful

Landingafirstjobandlearningthefundamentalsof
savingandinvestingareimportantcomingofage
lessonsforchildren.Butalongwiththeexhilarationof
afirstpaycheckcomesoneoflifeslessjoyous
milestonestaxes.
Understandingthetaximplicationsofadependent
childsincomeisessentialforboththechildandthe
parents.Inadditiontohelpingyouandyourchild
avoidowingmorethannecessaryorrunningafoul
oftheIRSunderstandingandpayingtaxesisan
importantstepinachildsjourneytobecominga
financiallyresponsibleadult.
Ofcourse,complextaxsituationsshouldbediscussedwithataxprofessional,buthereareanswersto
sixcommonquestionsthatwillhelpyouandyourchildunderstandtheprimarytaxrelatedissues
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relatedtodependentchildrensincome.

1.

Willmychildneedtofileataxreturnonincomefromasummeror
afterschooljob?

The2015thresholdforhavingtofileataxreturnis$6,300ofearnedincome,includingtips.Different
rulesmightapplyifyourchildalsohasunearnedincomefromsavingsandinvestments.Welldiscuss
thatplusselfemploymentincomeinlaterquestions.
Evenifyourchildisntrequiredtofileareturn,therearegoodreasonstodosoanyway.Ifthe
employerwithheldfederalincometaxfromtheteenagerspay,heorshewillhavetofileareturnto
receivearefundifoneisdue.Yourchildmightbeabletoavoidwithholdingbyclaiminganexemption
onFormW4 ,providedthechildiscertainhisorherincomewontexceedthe$6,300threshold,and
notaxwasowedinthepreviousyear.Filingataxreturncanbeagoodexperienceforyourchild,and
theIRSmightnotlookkindlyonsomeonewhofilesforanexemptionandthenendsupexceedingthe
threshold.
Anotherlearningopportunitywillcomewithyourchildsfirstpaycheck.Inadditiontofederaland
possiblystateandlocaltaxwithholding,thepaystubwillreflectwithholdingforSocialSecurity,
Medicare,andpossiblyunemploymenttaxes.Althoughitmaycomeasasurprisetokidswhentheysee
thattheirfirstcheckisforlessthantheyactuallyearned,itcanbethestartofvaluablelessonsin
financialplanning.

2.

Whatifmychildispaidasacontractor,notasapayrollemployee?

Someemployersmaywanttoavoidthetroubleoftax
withholdingandotherresponsibilitiesbyclassifyinga
workerasanindependentcontractorfortax
purposes.Youngworkersmightthinkthatis
attractive,becausetheywonthaveincomeand
payrolltaxeswithheldfromeachpaycheck.

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However,thedownsideofsuchanarrangementcan
besignificant.Fortaxpurposes,yourchildwouldbe
treatedasselfemployed,meaningthatheorshe
wouldberequiredtofileataxreturnandpaya15.3%
selfemploymenttaxwhenincomeexceedsjust$400.
ThistaxisforSocialSecurityandMedicare.For
payrollworkers,theemployerpayshalfofthesetaxes,
9LHZ/DUJHU,PDJH
butselfemployedworkerspaythemall.Plus,being
selfemployedcomplicatestheindividualstaxreturnbecausequarterlyfilingsmayberequired.
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Achildissubjecttothesametaxrulesasanyotherbusinessowner.Ifyourchildearnsmorethan$400
throughbabysitting,mowinglawns,oranyofawiderangeofsimilarmoneymakingendeavors,the
selfemploymenttaxmightbeunavoidable.Butlookatitthisway:Yourkidislearningvaluablelessons
abouttheresponsibilitiesofbeinganentrepreneur.

3.

Willmychildneedtofileareturnforunearnedincomefrom
investments?

Theanswertothisquestiondependsonthetypeandamountofyourchildsincomeanditcanbe
confusing.
Onlyunearnedincome
Ifthechildhasonlyunearnedincomecapitalgainsordividendsandinterestfrominvestmentsthe
thresholdforhavingtofileataxreturnis$1,050for2015.
Earnedandunearnedincome
Ifyourchildhasbothearnedincomeandunearnedincome,thingsgetabitmorecomplicated.Heor
shewillhavetofileaseparate2015returneitherifunearnedincomeexceedsthe$1,050thresholdor
ifearnedincomeexceedsthe$6,300threshold,orifthetotalofunearnedandearnedincomeismore
thanthelargerof$1,050orthechildsearnedincomeupto$5,950plus$350.
So,forexample,ifyourchildearns$5,600fromasummerjobandhas$300inunearnedincome,heor
shewouldnotberequiredtofileareturnbecauseneithertheearnedincomenorunearnedincome
thresholdwasmetandtheearnedincomedoesntexceed$5,950plus$350.Ontheotherhand,$600in
earnedincomeand$600inunearnedincomewouldtriggerthefilingrequirementbecausethe
combinedincomeof$1,200exceedsthecombinedincomethresholdof$1,050.

4.

ShouldIeverincludemychildsincomeonmytaxreturn?

Youmaybeabletoincludeadependentchildsincomeonyourtaxreturniftheincomeconsists
entirelyofinterestanddividends(asopposedtocapitalgains),iftheamountoftheunearnedincomeis
lessthan$10,000,andifthechildisunderage19orafulltimestudentunderage24.Butotherthan
avoidingthehassleofpreparingandfilinganadditionaltaxreturnforyourchild,thereslittletobe
gainedfromdoingso.
Infact,youcouldowemoreintax.Forexample,achildsunearnedincomefrom$1,050to$2,100
wouldbetaxedat10%ifitsincludedonyourreturn.Ontheotherhand,ifyoufileaseparatereturn
forthechild,thetaxrateonthatportionoftheincomemaybeaslowaszero,becauseofthe
preferentialtaxratesforqualifieddividendsandcapitalgaindistributions.
Ifyouwantmoreinformationabouthowthisprovisionworks,takealookatParentsElectionTo
ReportChildsInterestandDividendsinPart2ofIRSPublication929 .
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5.

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Isthereanytaxadvantagetohavinginvestmentsinmychilds
name?

Keepingasignificantamountofinvestmentassetsinachildsnameusedtobeapopulartaxstrategy,
becauseitallowedinvestmentincometobetaxedatthechildspresumablylowerrate.Thesocalled
kiddietaxenactedin1986wasaimedatpreventingparentsfromabusingthestrategy,andin2006
therulesbecameevenmorerestrictive.
Fordependentchildrenage18andyounger(orunderage24ifafulltimestudent)in2015,unearned
incomeabove$2,100(fromataxableaccount)istaxedattheparentshighestmarginaltaxrate,which
islikelytobehigherthanthecapitalgainsratethatwouldotherwiseapplyiftheinvestmentswerein
theparentsnames.Belowthatthreshold,thefirst$1,050ofachildsunearnedincomeisnottaxed,and
thenext$1,050istaxedatthechildsmarginaltaxrate.
Althoughthereslittletaxadvantagetohavinginvestmentsinachildsname,itstillmighthavesome
educationalvalue.Openinganinvestmentaccountforachildandperiodicallycontributingtoitcan
beagoodwaytoengagethechildinthefundamentalsofinvesting.Butkeepaneyeonthechild's
accountearnings.Iftheybegintoexceed$2,100ayear,whenunearnedincomeabovethatamountwill
betaxedattheparent'shighestmarginaltaxrate,youmightwanttomakesomeadjustments.

6.

Howdoachildsincomeandinvestmentsfigureintocollege
financialaid?

Thisisntataxissue,butitisafrequentlyaskedfollowuptothequestionofwhetherinvestment
accountsshouldbeputinachildsname.Agoodstartingpointforfindingtheansweristhefederal
formulaforcalculatingtheexpectedfamilycontribution(EFC)towardahighereducation.Getan
estimatewiththeCollegeBoardEFCcalculator .
AlthoughtheEFCformulaisadjustedfromyeartoyear,ingeneralitincorporates20%ofastudents
assets(money,investments,businessinterests,andrealestate);50%ofastudentsincome(aftera
$6,300threshold);0%to5.6%oftheparentsassets(notincludingthefamilyhouseandretirement
assets);and0%to47%ofaparentsincome(basedonaslidingscale).
Asyoucansee,achildwithsignificantinvestmentresourcesandincomecouldbeadverselyaffectedin
thefinancialaidcalculation.Butkeepinmindthattheresnotmuchtaxincentivetoputalargeamount
ofinvestmentsinachildsnameanyway,andoneofthebestwaystosaveforcollegetodayisa529
planthatnamesthefuturestudentasthebeneficiary,nottheowner.Theseassetsareconsidered
parentalassetsandarefactoredintofederalfinancialaidformulasatamaximumrateofabout5.6%,
vs.the20%ratethatisassessedonstudentassets.Achildowned529account(inacustodialaccount)
isalsotreatedasanassetoftheparentforFreeApplicationforFederalStudentAid(FAFSA)purposes.
A529plancanhavesignificanttaxbenefitsfortheowner,inthatanyearningsgrowfederalincometax
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deferredandwithdrawalsusedforqualifiedhighereducationexpensesarefreefromfederalincome
taxesand,inmanycases,fromstatetaxes.FormoreinformationreadViewpoints:"TheABC'sof529
collegesavingsplans."
Formoststudents,thepotentialnegativeimpactofparttimeorsummeremploymentonthecollege
aidincomeformulaisntgoingtooutweighthemanyfinancialandlifelessonslearnedbyhavingajob.
Inaddition,collegefinancialaidexpertspointoutthattheformulaforcalculatingaideligibilityis
subjecttochange,thatmanycollegeshavetheirownformulas,andthatfinancialaidofficershavegreat
latitudeindecidinghowmuchaidachildreceivesandinwhatform.

,QFRQFOXVLRQ
Solongasyourchildremainsadependent,therewillbetaximplicationsforyou.Withalittlesmarttax
planningandconsultingataxprofessionalifyoursituationiscomplexyoumaybeabletomanage
theimpact.Andbyinvolvingyourchildrenintaxdecisionsandpreparingtaxreturnswhentheyreach
theappropriateage,youcanteachthemaboutthisimportantaspectoflifelongfinancialplanning.

/HDUQPRUH
ReadDoYouNeedtoFileaFederalIncomeTaxReturn?
ReadIRSPublication929:TaxRulesforChildrenandDependents

Readabouttheadvantagesof529collegesavingsplans.

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