Kids and Taxes

Have you wondered how much kids can earn tax free and when they have to file returns? Here's a summary.

For memory purposes, two numbers: 5000 and 1000.

Those aren't exact, but close enough. If your child earns from working over $5000, they'll owe taxes. (That's the Fed rule, states are another matter.)

If they earn over $1000 in investment income, interest, dividends, etc., they'll owe tax.

Now, there are situations where they can or must file. If they have withheld taxes, they can file to get those refunded. If they (you) sold mutual funds, they need to file since IRS only sees the sale amount and not the net gain/loss. If they're self employed in something other than babysitting or lawn mowing and net over $500, they must file and pay some self employment tax, even though there'd be no income tax until they got to $5000.

And there's an opportunity: IRA's or Roth's. As long as the student has earned income from working, they can contribute to an IRA or Roth (the Roth makes the most sense, usually, at that age). The 2007 limits are $5000 for a contribution. So if they earned $5000, they could put that amount in a Roth. Imagine what happens with all those extra years to compound! If you can only get the cash before they buy more video games or itunes…