Did your children have a summer or after school job in 2018? If your minor children received W-2s from a job, or if they have unearned income like interest and dividends, they may be required to file an income tax return.
Generally, if their W-2 income is less than the $12,000 filing requirement, they don’t have to file a tax return. However, in some cases, they may still want to file to get back any taxes that were withheld by federal, state or local governments.
If your kids worked for themselves mowing lawns, babysitting or even selling lemonade, they are considered self-employed and can claim “ordinary and necessary” job-related expenses on Schedule C. They will need receipts, but this can reduce the amount of taxes they pay or increase their refund.
When it comes to unearned income, like that from interest or dividends, the rules get more complicated with the Tax Cuts and Jobs Act. All income has to be considered to determine if a return has to be filed and how much tax is due. If your children have investment income, we highly recommend giving us a call, so we can help you properly file a return on their behalf.
Something else to consider, if you can talk your kids into it, is to open a Roth IRA with some of the money they earned. For example, with an average annual return of 7%, $2,000 will grow to $65,560 if untouched over 50 years. That same money invested 10 years later would only grow to $32,622, so your return is doubled with those additional 10 years.
It is exciting watching your kids enter the workforce and start showing some independence, but it is also time to make sure they know how taxes work and teach them to be responsible with their hard-earned cash. If we can answer any questions or help in any way, don’t hesitate to reach out.