Parents’ Responsibility for a Child’s Tax Return or Taxable Income

If you have a child who has income, the child may have to file his or her own income tax return, even if you claim the child as a dependent. The fact that your child has income and has to file a tax return does not mean that you cannot claim the child as a dependent. According to the IRS, if you meet the requirements and are entitled to claim the child as a dependent, your child cannot claim a personal exemption on his or her return even if you do not claim the dependent exemption.

The IRS points out that if you have a dependent child who must file a return but is not able to file it for some reason, such as age, you as the parent must file it for your child. If the child cannot sign the return you can sign the child's name on the return followed by the words "By (your signature), parent for minor child. If you e-file, you would create a PIN.

If you as the parent sign the return for your child, you can deal directly with the IRS on any matters related to the return. If the child signs the return, you can only provide information and pay the tax. You would not be entitled to receive information from the IRS or agree to any binding tax liabilities on the child.

But if you indicate yourself as the Third Party Designee on your child's return, you would be able to respond to any IRS notices and receive information about the processing of the return. This designation does not allow you to receive a refund check or bind the child to a tax liability.

According to the IRS, a child's earnings from performing services are his or her own income, even if under local law the parents have the right to the earnings. Therefore, if the child has earned income and meets the filing requirements, the child must file a return. If the child does not pay the tax, the parent may be liable.

But you may be able to include your child's interest and dividends, including distributions from a trust in your tax return. You can do this if your child was under age 19 or a full-time student under age 24, your child's only income is from interest and dividends and is less than $9,500 (for 2011), the child would have to file a return if you do not include the income in your return, and no estimated tax was paid in your child's name and there was no tax withheld from the income. To make this election you must file Form 8814 with your tax return. By doing this you may pay tax at a higher rate than if a return was prepared for your child, if you are in a higher bracket.

If your child has interest, dividend and other investment income totaling more than $1,900, part of that income is taxed at the parent's rate. This is known as the "kiddie tax" and is intended to avoid shifting income to a child at a lower tax rate. This tax is calculated on Form 8615, which is attached to the child's tax return. IRS Publication 929, Tax Rules for Children and Dependents, includes detailed information and examples on how to prepare Form 8615.

If you elect to include the child's interest and dividends on your return by filing Form 8814, you do not have to file Form 8615.

Sources:

Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900

Form 8814, Parents' Election To Report Child's Interest and Dividends

Publication 501, Exemptions, Standard Deduction, and Filing Information, IRS