Let’s talk a little about the tax rules for children. A dependent child under the age of 19, as well as full-time students under the age of 24, must generally file a federal tax return for 2012 if the child has:
Your dependent child’s basic standard deduction is generally the greater of $950 or their earned income (up to the regular standard deduction of $5,950). No personal exemption is allowed on your child’s return if the child can be claimed as a dependent on your return.
Under certain circumstances, if your child is younger than 19 years old or under age 24 if a full-time student, you may elect to report your child’s income on your return. This election alleviates the need for your child to file a separate return. However, this election is available only if your child’s income is comprised entirely of interest and dividends; your child’s income is less than $9,500, and no estimated tax payments have been made in your child’s name and Social Security number. The downside to this election is the additional income increases your adjusted gross income, which could cost you the loss of tax credits and itemized deductions.
If your child’s investment income was more than $1,900 in 2012 and the child is required to file a tax return for the year, then part of your child’s investment income may be subject to tax at your income tax rate, thus, subject to “Kiddie Tax.”
Kiddie Tax is actually not a tax at all. Instead, it is a limitation the IRS has put into place allowing a child under age 18 to have unearned income taxed at the child’s lower tax rate. Next week, I’ll take a closer look at the “Kiddie Tax” and how it may affect your adjusted gross income.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.