Last night I tackled the ugly task of pulling all our tax paperwork together. As much as I’d love to keep our tax records organized throughout the year, that never seems to happen. Anyway, while downloading our 1099-INT Form from ING Direct, I noticed that our kids did pretty well last year in terms of interest earned on their high yield savings account.
For reasons that I won’t go into here, these are not subaccounts under my wife’s and my name. These are actually dedicated accounts in each of our kids’ names. So… Do our kids have to pay taxes on these earnings?
Do kids have to pay taxes?
The short answer is no. The longer answer is that, for the 2009 tax year, you don’t have to file taxes unless your earned income was greater that $5700, or your unearned income (e.g., dividends or interest) was greater than $950. Since their interest earnings are below the $950 threshold, they don’t have to pay taxes.
If they did have to pay taxes, we’d have the choice of attaching it to our own return using IRS Form 8814 (subject to some limitations), or we could complete an individual tax return for each of our kids.
So what about the “kiddie tax”?
If your child’s investment income totals more than $1900, then a portion of their income may be taxed at your rate instead of theirs. The purpose of this so-called “kiddie tax” is to prevent wealthy parents from gifting investments to their young children as a tax dodge.
If you don’t claim this income on your own tax return, then you should use IRS Form 8615 to figure your child’s tax and attach it to their return. Note that, as of 2008, “children” are defined as being under 19 and claimed as a dependent, or full-time students under the age of 24.
7 Responses to “Do Kids Have to Pay Taxes? All About the Kiddie Tax”
Thank you for posting. I now understand they do not have to pay taxes but my question is do they have to file the paperwork ?
You may want to be careful about state income taxes. In Pennsylvania a child has to pay on whatever they make in earned income. Our son had a fudge business for a couple of years and sent his payments in. The first time we paid with one of our checks. The second time he paid in cash. It seems crazy to pay taxes on amounts that don’t cover the salaries and overhead of people that process the paperwork, but there you have it.
Our 529 plan web page (mnsaves.org) says that any disbursement from earnings for a qualified expense are not taxable, but k-12 expenses aren’t qualified.
Your state’s rules (or the state the 529 is in) might be a little different but I bet they have the info on the web.
I have a related tax question…maybe someone could point me in the right direction. My parents have contributed to a 529 for both of my kids. Each child received a distribution in 2009 to help w/ unexpected private school expenses (not college). It was actually distributed in their name, not mine or my husband’s. Each distribution was less than the $5700 threshhold and there were no gains-actually a bit of a loss. Obviously, there were no earnings, but do I need to file a tax return on their behalf? I cannot find the answer to this anywhere online or in the tax software we are using for ourselves.
“As much as Iâ€™d love to keep our tax records organized throughout the year, that never seems to happen.”
Same here! Husband is self employed (schedule C!), but I do the paperwork & taxes. Each year at tax time, I kick myself for not logging things through the year! (I briefly review them monthly to make sure nothing is out of whack, but I really do need to LOG things monthly so I’m not logging a year’s worth of stuff at year end!). And each year, I swear I will log things monthly in the next year….but I never do…and so the cycle continues! Guess what I was doing last night? 😉
Our 8 month old and 2 year old both have their own savings account (Minor Custodian Account with my wife as guardian) That is where we put all the checks they received from birthdays and baptism.
Pay to Caeser what is Caeser’s. It is good to know that you can put an account into your children’s name and not file a return under the threshold. Is there any age minimum? Would you be able to have a bank account for your four year old to earn interest on?