Federal Tax Liability of Dependent Minors

by Michael Marz

    When claiming your child or other minor as a dependent, you may have the responsibility of ensuring that a separate tax return is filed for him in years he has income. The tax rules that govern when a dependent minor has an obligation to file are a little different than the rules that apply to the average adult. But depending on the type of income your dependent reports, you may be able to combine his federal tax liability with your own.

    Earned or Unearned

    To assess whether to file a tax return for your dependent minor, it's necessary to determine how much of her income was earned and unearned. Earned income refers to employment wages, independent contractor fees and essentially all other forms of compensation for providing services. Unearned income, therefore, covers every other type of reportable payment that doesn't qualify as earned income. Typically, a minor's unearned income is from investments, such as bank interest and dividends, but it can also relate to a scholarship or grant she receives. Educational scholarships and grants are tax free up to the cost of attendance -- which includes tuition, fees and required books and supplies. If the scholarship or grant exceeds the cost of attendance, the excess may be taxable.

    Minor Filing Thresholds

    Minors who only have earned income to report are required to file a tax return if the amount is more than the standard deduction available to single filers. When a minor child has only unearned income to report, a tax return is necessary if it totals more than $950. If the minor's gross income consists of both earned and unearned income, a tax return is required if it's more than the larger of $950 or the minor's earned income plus $300 -- up to the standard deduction for single filers.

    Filing the Return

    Generally, it's the child's responsibility to file all required tax returns. If a child is too young to prepare and file her return, responsibility shifts to the parent or guardian. If your child can't sign her name on the return, you can do it for her by inserting the phrase: “By (your signature), parent (or guardian) for minor child” in the return's signature box. If your child is under the age of 19 -- or under 24 and a full-time student -- and she only has income from interest and dividends totaling less than $9,500, you may be able to avoid filing a separate return and report her income on your own return by attaching Form 8814 to it, though your tax brackets may be used instead of hers.

    Filing Tips

    When preparing a separate tax return, remember that your child cannot take a personal exemption. As the minor's parent or guardian, you'll continue to take his dependency exemption. Moreover, the standard deduction that minors can take isn't a fixed amount like it is for adult taxpayers. The minimum standard deduction available to minors is $950. If the sum of a minor's earned income plus $300 is larger than $950, use the sum as his standard deduction, but the maximum is limited to the standard deduction for single filers.

    About the Author

    Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.

    Zacks Investment Research

    is an A+ Rated BBB

    Accredited Business.