If your child only has earned income reported on a W-2 and the total isn't more than $5,350, then a return does not need to be filed. However, you'll want to file a return for a refund if there was any federal withholding, see Form W-2, box 2. If the total of earned income is over $5,350 a return must be filed.
Earned income includes wages and salaries on Forms W-2. If the child is self-employed, the Schedule C net income is included as earnings.
If the child received any 1099-INT, 1099-DIV, or 1099-B tax documents in addition to those W-2s, then unearned income was received and the rules does not apply.
Only unearned income
What if your child has no earned income (W-2 or self-employment) but does have unearned income (also known as investment income). The answer depends on how much unearned income there is for the tax year.
To find the child's unearned income, look for Forms 1099-INT, 1099-DIV, and 1099-B with the child's social security number.
Unearned income includes taxable interest, dividends, capital gains (including capital gain distributions) and distributions from trusts.
The child's tax return only needs to be filed if the total unearned income is more than $850.
There is another option if your child is in this situation – the child's parents may be able to elect to have the child's income included on their tax return. If the parents make this election, the child does not have to file. The tax ramifications of this election will be discussed in a future article.
This is where is gets complicated. In short, if your child has any earned income reported on a W-2, then a return must be filed if they also had unearned income greater than $300. The only exceptions to this are if the combined income is less than $850 or the earned income is greater than $5,150.
529 savings plans
These savings plans generally allow people of any income level to contribute, and there are no age limits for the student. The account owner can maintain control of the account until funds are withdrawn — and, if desired, can even change the beneficiary as long as he or she is within the immediate family of the original beneficiary. A 529 plan is also extremely simple when it comes to tax reporting — the sponsoring state, not you, is responsible for all income tax record keeping. At the end of the year when the withdrawal is made for college, you will receive Form 1099 from the state, and there is only one figure to enter on it: the amount of income to report on the student's tax return.
(Charles Sims Jr. is president/ CEO of The Sims Financial Group. Contact him at 901-682-2410 or visit www.SimsFinancialGroup.com.)