Many people wonder, does a minor pay taxes and when they are required to file a tax return. The answer depends on several factors, including the amount and type of income a minor earns during the year. Minors, like adults, may have to pay taxes if their income exceeds certain thresholds. Understanding these rules can help families know when a minor must file taxes and how to handle their tax responsibilities properly.
This blog will explore the details of taxable income for minors, the tax consequences they face, and the available tax credits and deductions that can reduce their tax burden. Whether the income comes from jobs, investments, or gifts, it is important to know how tax laws apply to minors and when they must report earnings to the IRS.
Taxable Income for Minors
Like adults, minors (individuals under the age of 18 or 19 for certain circumstances) must abide by tax regulations and considerations. Knowing the impact of minors’ income on taxes is important to remain compliant and avoid penalties.
Earned Income
Earned income is all money a child gets from work, such as wages, tips, or self-employment. Minors who have paying jobs are subject to the same reporting requirements for earned income as adults.
This will often be due to experience in part-time work jobs or perhaps even running a small business. Minors, whether employees or self-employed, need to keep careful records of how much money they earn, and what they spend, so that they can correctly report and pay tax.
When it comes to earned income, it’s written in the tax code that minors are to be taxed at the same rates and by the same rules as adults, just like there for adults. It means that they still perhaps have to pay income, social security, and Medicare taxes on their income if they are earning a too-high sum without deductions or credits.
Unearned Income
Unearned Income is money a child gets from other sources than working in a job, such as interest from savings, dividends, capital gains, or trust distributions. This income is treated with special tax rules that apply to income for children – the so-called “Kiddie Tax.”
This was created to stop parents from giving their kids investment income to be taxed at their lower rates. The Kiddie Tax rules target a portion of a minor’s unearned income in excess of a certain threshold that is subject to tax at their parents’ higher marginal tax rate instead of at the child’s lower tax rate.
The Kiddie Tax threshold in the 2023 tax year is unearned income over $2,500 The kiddie tax is paid on amounts above the $2000 threshold, but this amount is taxed at parents’ marginal tax rate.
Tax Implications of Minor’s Income
Knowledge about minor’s income tax implication helps in effective handling of tax burden. It follows from this that the implications (of a UBI-cafeteria consumer type nexus) are somewhat different depending on whether the income is earned or unearned.
Filing Requirements
Minors with earned income in excess of a certain point must file an income tax return; employers may also be required to file information about minimum wage-earning minors. Otherwise, the filing requirement begins at $400 of net earnings for those who are self-employed.
Unearned Income: Self-prepared income tax return if a minor has unearned income over $1,150. The threshold for the kid tax is $2,300 of unearned income, which over that amount is taxed at the parent’s rate
Tax credits and deductions available to minors
In most cases, minors are held to the same tax rules as adults, but they may qualify for certain taxes, credits, and deductions, including:
Earned Income Tax Credit (EITC)-Minors who meet the age and income requirements may be eligible for the EITC, which is a refundable tax credit designed to reduce the number of low-income individuals and families living in or near poverty.
Child Tax Credit: This credit may lower your tax bill or provide you with a refund even if you do not owe any tax.
If your child is a dependent and meets other requirements, you may qualify for education credits, like the American Opportunity Tax Credit and Lifetime Learning Credit, to help defray the cost of tuition and other qualifying expenses, which you can take for tax year 2018.
Standard Deduction: Minors have the right to claim the standard deduction, thereby decreasing their income amount based on tax, the same thing adults do The standard deduction for a single filer under 65 years old will be $13,850 for 2023.
Deductions Against Self-Employment Income: If a minor has self-employment income, he or she can deduct certain business expenses, such as supplies, equipment, or, if applicable, home office expenses, to offset his or her taxable income.
Keep in mind that certain tax credits and deductions might be limited by income or other eligibility rules, so your mileage may vary.
Conclusion
It is essential for minors, as well as their parents or guardians, to understand key tax facts to ensure compliance and avoid penalties. Knowing the types of income a minor can earn, the tax laws that apply, and the available credits and deductions helps families make informed decisions when filing taxes. For an easy and accurate way to estimate taxes, minors and their families can use Beem’s Income Tax Calculator — Return and Refund Estimator 2023-2024 to quickly get a clear picture of their federal and state tax obligations, all for free. Download the app here.
