If your teen has a job this summer, you’re probably thankful. No more begging for money! Uncle Sam is happy, too. While summer jobs have expected tax implications for the working teen, parents may bear a surprise impact on their tax returns. Let’s look at some questions you may run into.
Can I claim their income on my tax return? If your teen is working or receiving income other than interest, dividends and capital gains, they must file their own tax return. The taxes on their wages or self-employment income are based on their own low tax rate.
What age do you have to start filing a tax return? There is no minimum age to start filing a tax return, but there is a minimum filing requirement. Generally, a dependent child must file a tax return if their unearned income exceeds $1,000 or gross income tops $6,300. However, if your teen earns as little as $400 in self-employment income, they may be required to file an income tax return.
Can I still claim my working teen as a dependent? Tax rules for a dependent child are different than any other type of dependent. If your dependent child is under age 19 or is a full-time student under age 24, your child can have any amount of income and still be claimed as your dependent as long as they do not provide more than half their own support. This includes gifts, food, shelter, clothing and school expenses to name a few. Note that if your teen can be claimed as a dependency exemption on your tax return, they cannot claim their own exemption. Additional rules apply for divorced parents.
What is the kiddie tax and does it affect me? The “kiddie tax” can wreak havoc on unprepared taxpayers. This tax is designed to prevent parents from shifting investment income to their kids to take advantage of lower tax brackets. The kiddie tax applies to children under 19 years of age and qualifying dependent children ages 19 to 23 who are full-time students. Under the kiddie tax, children pay tax at their own tax rate on unearned income they receive up to $2,100. Here’s the hitch – all unearned income kids receive above the threshold amount is taxed at their parent’s highest income tax rate. Unearned income comes from investments such as interest, dividends and capital gains. Any salary or wages that a child earns through employment are not subject to the kiddie tax rules – that income is taxed at the child’s tax rate.
Can I still claim the child tax credit? Each dependent child under the age of 17 can qualify you for the $1,000 per child tax credit. The credit is available even if your child is working and files a tax return. Your filing status and income may reduce or eliminate the credit.
Why would you file if there is no requirement? Sometimes a young earner should file a return to retrieve income taxes withheld, even when there’s no filing requirement. If you don’t expect annual earnings to exceed the filing requirement, note “exempt” on line 7 of form W-4, instead.
Can I file on a smartphone? No matter how convenient, do not prepare and file a tax return on a smartphone. Identity theft, lost records and errors are common issues if you cut corners on tax return preparation and filing. Steer clear of using smartphone applications.
Bottom line: Taxes are complex and even more so when you have a working dependent. Seek the advice of a tax professional to understand which tax implications may affect you.
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