This column discusses under what conditions a dependent child has to file a 2020 federal income tax return and when a child’s income is taxed.
Edward A. Zurndorfer
Many employees have dependent children who received income during 2020. For example, a child may have worked over the summer months or after school. Or a child may have been the recipient of investment income such as interest and dividends. The question that many parents of these children are asking at this time is whether these children have to file a 2020 federal income tax return, even when these children are claimed as tax dependents on their parents’ tax return. This column discusses under what conditions a dependent child has to file a 2020 federal income tax return and when a child’s income is taxed.
Tax Overview of Dependent Children
In general, a dependent child must file a 2020 federal income tax return if any of the following apply:
- Unearned income during 2020 exceeding $1,100. Unearned income includes taxable interest, dividends, capital gains, the taxable part of Social Security and pension payments, certain distribution from trusts, and unemployment compensation.
- Earned income over $12,400. Earned income includes salary or wages.
- Gross income during 2020 is more than the greater of: (1) $1,100 or (2) earned income plus $350 (not to exceed $12,400).
The following example illustrates:
Elizabeth, age 16, is the daughter of Frank and Julia. During 2020, Elizabeth receives $100 of taxable interest and $4,000 of taxable dividends for a total unearned income of $4,100. Elizabeth must file a 2020 federal income tax return because her unearned income exceeds $1,100.
Note 1: The above filing requirements assume the dependent child is unmarried and under age 65.
Note 2: For a dependent child who is blind, add $1,650 to above minimum dollar fling requirements.
Note 3: Even if a child is not required to file a tax return, a child who earned a salary during 2020 in which federal income taxes were withheld should nevertheless file a 2020 tax return in order to claim a refund of the federal income taxes withheld.
Tax Treatment of a Dependent Child’s Income for 2020
The following table summarizes the tax treatment of a dependent child’s income for 2020:
| Type of Income | Income Range | How Taxed |
| Earned Income Only | $0 – 12,400 Over $12,400 | Not taxed Child’s tax rate |
| Unearned Income Only | $0 – 1,100 $1,101 – 2,200 Over $2,200 | Not taxed Child’s tax rate Parents’ tax rate |
| Both Earned Income and Unearned Income: | ||
| Unearned Income | $0 – 1,100 $1,101 – 2,200 Over $2,200 | Not taxed Child’s tax rate Parents’ tax rate |
| Earned Income | Earned income minus remaining amount of standard deduction1 | Child’s tax rate |
The “Kiddie” Tax
The “kiddie” tax applies when all four of the following requirements are met for the tax year: (1) a child does not file a joint tax return for the year; (2) one or both of the child’s parents are alive at the end of the year; (3) the child’s net unearned income for the year exceeds the threshold for that year ($1,100 during 2020) and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction; and (4) the child falls under one of three age rules summarized in the following table:
Children Subject to the “Kiddie” Tax Rules1
| Age at Year-End | “Kiddie” Tax Rules Apply If: |
| Younger than 18 | Always apply |
| 18 | Child’s earned income is less than 50 percent of his or her support |
| 19-23 | Child is a full-time student and earned income less than 50 percent of his or her support |
| Older than 23 | Never apply |
Child’s Tax Filing Options
If a child has to file a 2020 federal income tax return for himself or herself, the following are the child’s filing options:
- Child files his or her own return. Form 8615 (Tax for Certain Children Who Have Unearned Income) must be completed and attached to the child’s Form 1040, or
- Parents report child’s income on their return as explained below; certain tests must be met to do this.
Note that if a child files his or her own return (thus having to complete Form 8615), the parents’ taxable income must be computed first in order to complete Form 8615. Parents who cannot prepare their own return by the child’s filing due date may enter a reasonable estimate of their taxable income on the child’s Form 8615. The word “estimated” should be entered on the appropriate lines. If the final information from the parents’ tax return differs from the estimated amounts originally reported, then the child must file an amended return (Form 1040X). A better option may be to request an extension to file the child’s tax return until the final information from the parents’ return is available.
With regard to signing the return, if the child cannot sign the return, either parent may sign the child’s name in the appropriate space. The parent should include the notation: “By (parent’s signature), parent for minor child.”
Reporting Child’s Income on Parents’ Return
If certain requirements are met, parents of a child who is subject to the “kiddie” tax may elect to report the child’s income on the parents’ tax return. The election to do so is made by completing Form 8814 (Parents’ Election to Report Child’s Interest and Dividends). This option is available if all of the following conditions are met: (1) the child’s only income is from interest, dividends and capital gains distributions; (2) the child’s gross income for the year is less than $11,000; (3) no overpayments from the 2019 tax year return are applied to the current 2020 tax year returns; (4) no estimated or withholding tax has been paid in the child’s name; (5) the child was under age 19, or under age 24 if a full-time student, at the end of 2020; and (6) the child is required to file a 2020 tax return and does not file a joint return.
There are advantages and disadvantages when parents report a child’s income on their tax return.
The advantages are: (1) no need to file a separate tax return for the child; (2) parents’ investment income is increased, which may allow a larger investment interest deduction; and (3) the parents’ adjusted gross income (AGI) limit on charitable contributions is increased.
The disadvantages are: (1) possible lost deductions such as child’s charitable contributions are not allowed on parents’ tax return; (2) possible greater net investment income (NII) tax because the child’s investment income will be included in the calculation of the parents’ NII for purposes of the NII tax which the parents could be subject to; and (3) greater tax on child’s income (as much as $110, 10 percent of $1,100).
Note that the rules regarding when a child has to file a tax return apply to multiple children of the same family.
Parents are therefore encouraged to weigh the advantages and disadvantages of including a child’s 2020 income on their 2020 federal income tax return before deciding how to report a child’s 2020 unearned income. Parents who have any problems or questions as to how to report a dependent child’s 2020 income are encouraged to contact a tax professional.
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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
