Children and other dependents can choose to either have their guardians or parents file a return on their behalf or file a tax return for themselves. However, there are various rules that apply to the taxation of dependents. Some of these rules are provided below:
- Claims on Personal Exemptions - In 2010, the personal exemption for all taxpayers was $3,650.00. However, dependents cannot claim personal exemptions on their tax return. Instead, their parents or guardian claim the exemptions on their tax returns on behalf of their dependents.
- Age Limit for Dependent - There is no age limit to being a dependent - there is no bottom or top limit. A child can file a return as a dependents as early as possible and people even beyond the age of 18 can continue to be dependents in qualifying circumstances.
- Earned Income Cap - If a dependent's income is only comprised of earned income, they are expected to file a return if the amount is more than $5,700.00. However, if they had withheld income and received W2 forms, it may be in their interest to file a return as they may be eligible for various tax breaks. Earned income includes income made from personal labor such as wages, salaries, tips, and fees and commission earned from services provided.
- Unearned Income Cap - Unearned income on the other hand, are incomes that are made without providing personal labor. This includes incomes such as dividends, capital gains, interest, and distribution from a trust. If a child or dependent received unearned income above $950.00, they are expected to file a tax return.
- Cap on Income Mix - If a child or dependent has both earned and unearned incomes, they will be expected to file a return if their total income is more than $950.00 or if their earned income is at least $5,400.00 and the unearned income is more than $300.00, whichever is higher.
- Circumstances that Dependent Must file return - There are circumstances in which a dependent is required to file a return, even if their income is below the aforementioned minimum incomes. These circumstances include when the dependent owes taxes for Social Security and Medicare. If the dependent receives any Earned Income Credit paid in advance, they will also file a return, regardless of one's incomes. Dependents who earn more than $108.00 from religious organizations that do not withhold Medicare and Social Security and dependents that make more than $400.00 from self employment are also required to file tax returns.
- Tax Credits for Dependents - A child or dependent can claim various tax credits, including Making Work Pay tax credit available in the 2011 tax year and education related tax credits and deductions.
- Standard Deductions for Dependents - Dependents who choose to file their own returns can claim standard tax deductions to whichever has the higher value: between $950.00 or earned income plus $300.00, to a cap of $5,700.00.
- Children's Tax Returns - Children can file their own tax returns. However, any penalties and audits will be addressed to the child. If the child is very young, the IRS expects that the guardian provides his or her signature next to that of the child and indicate that they are the parent or guardian. This way, in case of any recourse, the parent can take responsibility. When children file their own taxes, they get an early start to knowing about taxation and personal financing.