Recently, the Internal Revenue Service (IRS) is making it crystal clear that age is no bar when it comes to tax obligations. Regardless of whether your teenager has just encountered their first pimple or is yet to hit the open road with their first driver’s license, the IRS demands compliance if there’s income in the picture.
The taxman isn’t turning a blind eye to the pocket money earned through summer or after-school jobs, virtual endeavors on platforms like Roblox and YouTube, or even gains from a youth trading account. According to the IRS, any income surpassing specified thresholds must be duly reported and will have to pay taxes to the IRS.
What Minors Need to Know About IRS Obligations
Well, sadly, this is actually true, but don’t you panic and keep your kids away from this information, for now. Let’s take a closer look at what this implies for you and your children. As tax season unfolds, parents and their industrious offspring are advised to acquaint themselves with the rules and thresholds set by the IRS, ensuring a smoother journey through the often perplexing landscape of taxation.
While the prospect of kids earning their own money is undoubtedly exciting, tax time may bring about confusion, albeit with a dose of education. Parents and young earners alike grapple with questions like when a child must file a return, who holds the responsibility for filing, and, crucially, what tax rate applies to their budding income.
The answers, as per the IRS guidelines, hinge on the type and amount of income earned by the young taxpayer. This unexpected intersection of youthful pursuits and financial responsibilities underscores the importance of financial literacy from an early age, as young individuals navigate the intricacies of taxation in the pursuit of financial independence.
The Types of Income From Minors That the IRS Takes Into Account
Determining whether your dependent child needs to file an income tax return involves understanding the nature of the income earned. Here are the distinct categories:
- Earned Income: This includes money acquired through work, such as wages, tips, commissions, and any portion of a taxable scholarship.
- Unearned Income: Encompassing investment-related earnings like interest, ordinary dividends, and capital gain distributions.
- Gross Income: The sum total of both earned and unearned income before any tax deductions.
How much does a minor have to make to file taxes? Let’s keep reading to find the parameters to be considered:
Income exceeding the standard deduction of $13,850 is the threshold, particularly for individuals who are single and under the age of 65. To illustrate, consider the scenario of a college student juggling a part-time job throughout the school year and a full-time summer job, accumulating a total income of $14,000. In such cases, the earned income surpasses the standard deduction, warranting attention in the realm of tax considerations.
Exceeding $1,250 in unearned income becomes a factor in the tax equation. In certain scenarios, parents may opt to consolidate their child’s unearned income with their own on their tax return, potentially bypassing the need for a separate filing on the child’s part – a strategy we’ll delve into shortly. Consider, for instance, a teenager who ventured into investments using a youth brokerage account, accruing $1,500 in interest, dividends, and capital gains throughout the year. In this context, the unearned income surpasses the specified threshold, prompting considerations for tax planning.
Minors’ Incomes That Don’t Have to Pay Taxes
It’s important to clarify that minors, by definition, cannot have their own income and file their own taxes in the United States. However, income earned by a minor might be reported on another individual’s tax return, depending on their situation.
Minors with earned income, such as wages, tips, or self-employment earnings, face specific considerations when it comes to taxation. If the minor’s income falls below a designated threshold, which varies based on filing status and income type, it may be reported on a parent or guardian’s tax return under the “Kiddie Tax” rules. This ensures a fair and appropriate taxation of income earned by children. However, if the minor’s income surpasses the established threshold, they may be required to file a separate tax return, typically with the guidance of a parent or guardian.
On the other hand, minors with unearned income, stemming from investments or interest, encounter their own set of rules. Some unearned income may be tax-free up to a certain limit when held in the minor’s name. However, if the unearned income exceeds this limit, it could be subject to taxation at the parent’s tax rate, contingent on the amount and specific provisions.
First Weeks of Tax Season: IRS Issued $3.6 Billion in Tax Refunds
The 2024 tax season kicked off just a fortnight ago, starting on January 29, and taxpayers are already witnessing the IRS swiftly disbursing tax refund funds.
According to the IRS, taxpayers who file electronically and opt for direct deposit can typically anticipate receiving their refunds within 21 days. Remarkably, by February 2, a mere five days into the tax filing season, the IRS had already issued a staggering 2.6 million refunds.
In contrast, during the same period in 2023, the agency had sent out over 7.9 million refunds. It’s worth noting that last year’s tax season commenced six days earlier, on January 23, 2023, providing the IRS with nearly an extra week to process tax returns and distribute refunds.
As of February 2, the IRS reported processing 13.9 million federal income tax returns, reflecting a 16.9% decrease from the 16.7 million processed at the same point last year. The earlier start to the tax season in 2023 (January 23, 2023, compared to January 29, 2024) allowed tax filers an additional six days last year to submit their returns.
Furthermore, the IRS had received 15.3 million returns by February 2, showing a 19.1% decline from the 18.8 million received by February 3, 2023.