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Why Shouldn’t You Add Your Kid’s Income Onto Your Tax Return?

By Contributing Author 4 Comments - The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 10, 2014.

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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!

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Last Edited: 10th February 2014 The content of biblemoneymatters.com is for general information purposes only and does not constitute professional advice. Visitors to biblemoneymatters.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.

This article is about: Making Money, Taxes

About Contributing Author

We love to mix it up from time to time here at Bible Money Matters. Would you like to write for us as well? Please email us via the contact page with your article idea.

Comments

    Share Your Thoughts: Cancel reply

  1. Miranda says

    My mom worked for H&R Block for a few years, and she always had our income reported separately. She even made me fill out my own 1040-EZ to account for my high school jobs. It was a good lesson.
    Miranda´s last post ..Reader Question: How Much Life Insurance Do I Need?

    Reply
  2. JoeTaxpayer says

    I’ve seen people do this when the amount is trivial. $10 worth of interest, costing $3 in extra tax. If they wish to throw away $3, that’s their choice. The $950+$950 is a large sum to pay full tax on when you don’t need to. Good article, too bad people don’t realize this.
    JoeTaxpayer´s last post ..The Naughty Double Ohs

    Reply
  3. Tax Guy says

    The situation in the US is a little different from Canada. We have a similar problem here but we don’t allow joint filing so I personally don’t understand why anyone would add their child’s income to their own return.

    Reply
  4. Jason @ Redeeming Riches says

    I would imagine this is something that gets overlooked quite often – I don’t think parents really consider it. Good informative post – and GREAT last name by the way! :)
    Jason @ Redeeming Riches´s last post ..How to Keep Spouses From Growing Apart

    Reply
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