Is Your Child Required to File a Tax Return?

As kids get older, it is inevitable that they will want more money to buy things like clothes, music, their first car, etc. This will prompt many kids to get a job or even start their own business to earn money for all the extra "stuff" they want.

For most kids, the last thing they are thinking about when they get a job or start a business is whether they will need to file a tax return or owe taxes on the income they earn. And most kids won't even make enough to file, but some children will be required to file a return based on the amount and type of income they earn.

The rules for kids and taxes can sometimes be different than those for adults, so how do you know if your child is required to report their income?

When Are Kids Required To File a Tax Return?

Generally, children who can be claimed on another person's taxes must file their own return if:

• They have wages of $5,700 or higher (this is the standard deduction amount for 2009, the amount for 2008 was $5,450)
• They have unearned income (investment income from interest, dividends, etc.) of $950 in 2009 ($900 in 2008)
• They have total income (both earned and unearned) greater than the larger of $950 or their earned income plus $300.

Kids usually file their own tax return because they earned enough income from a job to be required to file or they paid in taxes and they are expecting those taxes to be refunded. Some children also have investment income in excess of the allowable limits and are required to file taxes to report their unearned income.

The following children may also be required to file a tax return:

• Those who have earned income and who received advanced earned income credit payments from his or her employer,
• Kids who had wages of $108.28 or more from a church that is exempt from employer Social Security and Medicare taxes, or
• Kids who had net earnings from self employment or their own business of at least $400.

Example: Sarah is 15 and is claimed as a dependent on her parents' taxes. In 2008, her only income was $250 that she earned from making jewelry and selling it to her family and friends. In 2008, she is not required to file a tax return.

However, let's assume that word about her jewelry spread and in 2009 she doubled her income. Assuming her net earnings (after expenses) from her jewelry business were $500, she would be required to file a 2009 income tax return.

Reporting Your Child's Income:

If your child is required to file a tax return only because he or she had investment income, you may be able to report the child's income on the parents' tax return, which would eliminate the need to file two returns.

However, children who have earned income from a job or who are self employed must file their own reports. Also, children who have self employed income will need to file two additional schedules - Schedule C Profit and Loss from Business and Schedule SE Self Employment Tax - and attach these forms to their federal income tax return.

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