Let me stress once again that the time to begin your tax planning for the year ahead was yesterday. Tax time is not the period just before your taxes are due.
On the assumption you did not have to put up your first-born child as collateral for your taxes due, let us talk a little about the tax rules for children and dependents under the age of 19 as well as children under age 24 who are students.
A dependent child under the age of 19, as well as students under the age of 24, must generally file a return if the child has:
- Earned income greater than $6,100;
- Unearned income greater than $1,000, or
- Earned and unearned income greater than $1,000 or earned income (up to $5,500) plus $300.
A dependent child’s basic standard deduction is generally the greater of $1,000 or their earned income (up to the regular standard deduction of $6,100). No personal exemption is allowed on the child’s return if the child can be claimed on the parents’ return. Under certain circumstances, parents may elect to report a child’s income on the parent’s return, thereby relieving the child of the need to file a separate return. This election is available only if the child’s income is comprised entirely of interest and dividends, the child’s income is less than $9,500, and no estimated tax payments have been made in the child’s name and social security number. This only applies if the child is less than 19 years old or under age 24 if a full-time student. The downside of the parent election is the additional income increases the parents’ adjusted gross income, which could cost the parents the loss of tax credits and itemized deductions.
If the child’s investment income is more than $2,000 and the child is required to file a tax return for the year, then part of the child’s investment income may be subject to tax at the parent’s rate. These “kiddie tax” rules do not apply to children 19 years or older or students over age 24.
Planning Ideas for Children
Assign some income—remember $2,000 of unearned income for a child will not create adverse tax consequences. Pay children when they work; earned income is not taxed at the parent’s rate. Also, the child could then contribute to a Roth IRA since they have earned income; this is a great savings for college!
For more information on Tax Planning for Children contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
