Basic Tax Question About Children

[shanenin]

We have been lazy in getting her return done. I assumed she had money coming back so we were not in any hurry. I claimed my child as a dependent on my taxes. She had about $3000 in wages in 2008. Since I claimed her as a dependent, she does not appear to get any deduction. So at the tax rate of 10% she owes $300. Does that seem correct? So every cent she made is taxable income, right? Her withholdings were less then $300, If that is the case, she has to pay in this year.

[Matt]

I've had years where I've made less than $5000 and I got every cent of my withheld back. I'm claimed as a dependent. If she filled out the 1040EZ it should tell you that she gets money back.

[shanenin]

exactly. That is what I thought. I must be reading it wrong. It seems to all depend on line 5 of the 1040ez. The way I am reading it, she gets a "0" entered there. Without any standard deduction, that leaves all of her income as taxable.

[Matt]

Have you done lines 10-12 on the form (and used the extra tax table pages to calculate the value)? I think that's the key IIRC.

[shanenin]

Thanks for the suggestion. That takes taxes owed about $300(based on the tax table) - withholdings of $122. That leaves her owing about $180. Since we files late, she has penalties.

edit added later//

I think I screwed up one of the worksheets. Working form a pdf document is confusing. I think I see where my problem may be.

edit added later//

she gets up to a $5400 standard deduction, even if I claim her. That solved that issue :-)

[tjet]

Minor children, like other taxpayers, have a choice between claiming itemized deductions or the standard deduction. Children usually have a small amount of itemized deductions or none at all, so in most cases they claim the standard deduction.

A taxpayer that isn't a dependent of any other taxpayer gets a standard deduction in a fixed amount, depending on filing status. (It's adjusted each year for inflation.) For a dependent child, the size of the standard deduction depends on how much earned income the child has (as opposed to investment income, which is considered unearned income for this purpose).

This complicated rule says your child's standard deduction is the greater of the following two amounts:

the minimum standard deduction ($950 for 2009), or

The child's earned income plus a base amount ($300 for 2009), but not more than the regular standard deduction for a single person ($5,700 for 2009).

Here's a way to make sense of this rule. Your dependent child's standard deduction starts at $950 and stays there if all the child's income is unearned income. When your child begins to have earned income, the first $650 will not cause any increase in the standard deduction — but after that, each additional dollar earned will increase the standard deduction by a dollar (effectively making the earnings tax-free) until the standard deduction reaches the amount that would be allowed if your child were not a dependent.

Personal exemption

The personal exemption is another fairly hefty deduction: $3,650 for 2009. Unfortunately, a child can't claim a personal exemption if someone else is entitled to claim the exemption. That's true even if the other person doesn't actually claim the exemption. The mere fact that someone else qualifies for the exemption is enough to disqualify the child from claiming it.

You can't give a personal exemption to your dependent child by not claiming it, but you may be able to help your child claim an education credit (Hope scholarship credit or lifetime learning credit) by not claiming the exemption. This can be a good idea if the child gets more benefit from the education credit than you can get from the exemption.

Minors can file their own tax returns, or parents can file for them.

You may be surprised to learn that your child is a separate taxpayer, even as a minor. If your child has enough income, he or she has an obligation to file a return and pay the tax. Here's a quote from a recent edition of IRS Publication 929:

Generally, the child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return.

When the IRS says "generally," it often means there are exceptions, and that is the case here. We'll look at three issues: who prepares the return, who signs the return, and who pays the tax if any is owed.

Who prepares the return

If the return isn't complicated, and your child is old enough to read and follow instructions, filling out a tax return could be a good learning experience. Naturally, you can help your child prepare the return, or you can handle the task entirely yourself. In fact, the IRS expects you to do so if your child isn't up to the task:

If a child cannot file his or her own return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on his or her behalf.

If your child's income consists entirely of dividends and interest, you may be able to eliminate the need for the child to file by reporting this income on your own return, using Form 8814. We explain these rules here.

Who signs the child's return

Your child doesn't have to be of legal age to sign an income tax return. Any child old enough to sign his or her name can do this. There's a catch, though. If you sign the return and the IRS ends up having questions, they can deal directly with you. If your child signs the return, there will be limits on what they can discuss with you and what actions you can take to resolve any issues, at least until you have a valid power of attorney to act on your child's behalf.

There's a middle ground. Your child can sign the return but show you as the "third party designee" using a space provided for this purpose near the signature line of the return. That gives you limited authority to deal with the IRS on the tax return without a power of attorney.

For greatest convenience in dealing with any issues that may arise on a minor child's tax return, the easiest solution is for the parent to sign the tax return.

Who pays the tax

As indicated in the quote at the top of this page, paying the tax (and interest and penalties, if applicable) is the child's obligation. For example, if your child owes tax because of income generated by a custodial account (UTMA or UGMA account), it would be appropriate to take money from that account to pay the tax, because the child (the owner of the account) owes the tax.

You can pay income tax for your child from your own money, of course, but generally when you do that you're making a gift to your child.

There is an exception to this general rule. If the law of your state gives you the right to receive income from work performed by your child, and you actually do receive the income, the IRS says you may be liable for the tax. The income is still reported on a tax return for the child (not on your own income tax return), but you'll have to pay if tax is owed for income earned by the child but received by you.

[Matt]

she gets up to a $5400 standard deduction, even if I claim her. That solved that issue :-)

Ahh, that sounds right. Glad you got it figured out.