As the year comes to an end, you may be accessing your financial plan in preparation for the New Year. While tax planning is something most working adults are generally informed about, there are tax obligations that some may not be fully aware of. If you have young children, it could come as a surprise that they may have US tax obligations of their own. If your child has earned income or even has unearned income in their name, they should be filing a Report of Foreign Bank and Financial Accounts or FBAR.
In order to learn whether your dependent should be filing a tax return, you need only look at their gross income. If a child has a part-time job and has earned income for the past year, in excess of $6,100 they are required to file an FBAR.
But, if a child has a gross income that is unearned and the result of dividends, interest, etc., they must file a tax return if the gross amount is over $1,000. When thinking about a child’s unearned income, it is also important to consider “Kiddie Tax.” If a child’s unearned income reaches a certain maximum, the income over that number starts being taxed at their parent or guardian’s tax rate. The Kiddie Tax was introduced to take into account high-net worth families who may gift assets that appreciate in value or produce income to their children, who could earn dividends taxed at a lower rate.
If a child has accumulated unearned income and is subject to the Kiddie Tax, there are some things you should keep in mind.
If the amount of unearned income is under $10,000, filing an FBAR can be avoided if the income is included on the parent’s tax return. There are special circumstances in which this is not an option, including if the child’s income is capital gains from the sale of securities.
If a child’s unearned income equals more than $2,000, part of this income may still be taxed at the parent’s rate, regardless if they file an FBAR or the income is included on their parent’s return. If a child has income in foreign financial accounts, they are also required to file Form 8938 (Statement of Specified Foreign Financial Assets). This is in addition to the FBAR and does not replace it.
New FBAR instructions added in 2014 highlight the importance of filing a tax return for a child who has income, whether earned or unearned. It should be noted that if a child is not old enough to file their own FBAR, a parent or guardian is legally responsible for filing the document for the child. Similarly, if a child’s age prevents them from signing their name, a parent or guardian may electronically sign the document.
To learn more about your child’s potential tax responsibilities, consult a tax professional for more information.