What Should I do if my Child Earns Taxable Income?

Anyone under the age of 65 who earns more than 5,000 US dollars (USD) in income must report taxable income to the Internal Revenue Service (IRS) in the form of an income tax return. If a child is blind, he doesn’t have to file a tax return unless he makes more than 6,250 USD. Basically, any earned income, whether by a child or an adult, is taxable income. Unearned income, such as that gained from investments or child support, is considered separate from earned income.

Unless a dependent child is unable to do so for any reason, she is responsible to file a tax return to report her taxable income. In many cases, a dependent child is too young to file a return on his own, in which case, the parents have the responsibility. The parent must file a separate tax return and sign it in the place of the child. The IRS considers any taxable income a child earns as the child’s, but in the end, the parent is liable for any taxes owed on the taxable income. Deductions may be claimed on the child’s tax return, even if the expenses may have been paid by the parent.

Once a parent knows how to file her child’s income tax return, she may wonder what she should do with her child’s earned income. Although typically, the market for kid’s bank accounts has never been profitable for the banking industry, many banks have programs designed specifically with kids in mind. Their goal is to make future customers, as well as to educate children on spending and saving. Parents who wish to safely store their child’s money should look for banks that offer savings accounts with low fees, no minimum balance and no limit on the number of monthly transactions or penalties for smaller deposits.

If a parent is interested in teaching his child about investing, many banks have programs for young investors. First Union Bank started a capital management account called CAP First for Kids, which combines a traditional bank account with a brokerage account. Republic Young Investors helps kids invest in companies like Coca-Cola and Disney.

There are also traditional routes for investing your child’s money, such as bonds, mutual funds and 529 educational savings plans. The US government has an entire website devoted to helping your child learn how to manage her money. Of course, if your child’s invested taxable income grows and he makes unearned taxable income over 800 USD, the IRS will want to hear about that as well.