This is an article by Carol Topp, CPA. Carol is the mother of two teenage daughters and she lives in Cincinnati, Ohio. She discusses teenagers and taxes at http://TeensandTaxes.com.
Bonnie had been adding her son's interest income to her tax return for many years. That was a $1,000 mistake. She was overpaying Uncle Sam and never realized it.
It is easy to understand why Bonnie reported her son's interest income as her own. The statements from her son's UTMA (Uniform Gift to Minors Act) account at the local bank had both her name and his name on the account. Her name was even listed first as “Bonnie Smith, Custodian for Luke Smith”.
Tax Breaks For Children
By simply adding Luke's interest to her own, Bonnie was missing out on some tax breaks allowed to children. The first $950 (in 2009) of investment income belonging to a child is not taxed at all. Investment income is interest, dividends and capital gain distributions from a mutual fund. The next $950 of investment income is taxed at the child's rate, which is usually lower than the parent's rate. Any investment income over $1,900 is taxed at the parent's rate and dubbed the kiddie tax. The kiddie tax is explained at my website TeensandTaxes.com.
Avoid Bonnie's mistake of adding your teenager's investment income to your own on your tax return. A teenagers' investment income can be included on a parent's tax return, but you must use a special form, Form 8814 Parents’ Election to Report Child’s Interest and Dividends.
The IRS warns that using Form 8814 could result in higher income tax. For my tax clients, I always file a separate return for the teenager or child. I avoid using Form 8814.
Teen W-2 Income Must Be Reported Separately
If your teenager has earned income from a job, he must file his own tax return. You cannot add your child's earned income, reported on his W-2, to your wages.
I fixed Bonnie's mistakes by filing amended tax returns for the previous three years. She received $1,026 in refunds, while her son Luke owed $114 for a difference of $912.
Even after paying my fees, it was worthwhile to fix her mistakes. It could be worthwhile in your situation as well. Please consult a tax professional for advice on your specific situation.
Have you made any of these mistakes when filing a child's taxes? Tell us about it in the comments!