Taking the Standard Deduction For Minor Children

You probably know all about claiming your child as a dependent on your federal income tax to offset your own income. But what if your child has income of his or her own? Interest on an investment, inheritance or trust fund, or later, even a summer job can be a reason for your child to file his or her own tax return, even if you are claiming your child as a dependent. So it’s important to understand what that entails for tax purposes.

First of all, your child CANNOT take a personal exemption if he or she can be claimed as a dependent on someone else’s taxes. The personal exemption is usually a rather hefty deduction, in the vicinity of $3,650 for 2009. Even if neither parent does claim the exemption for the dependent child, if they do qualify for it, the mere fact they are entitled to the exemption disqualifies the child from claiming it.

However, your child CAN take what is called a “standard deduction” in a fixed amount. The rules for the size of the standard deduction for a dependent child are rather complicated, but they depend on how much earned income the child had in a given year (as opposed to unearned investment income, which is not considered for qualification purposes). Basically, your child’s standard deduction should be the greater of the following two amounts:

• The minimum standard deduction for dependents (which was $950 in 2009), or:
• The total of the child’s earned income, plus a base amount (which was $300 in 2009), but not more than the regular standard deduction for a non-dependent person ($5,700 in 2009).

Confused yet? Basically, your dependent child’s deduction starts at $950, and if they earn any income – such as through a summer job or newspaper route – they need to earn more than $650 in order to see any increase in the standard deduction. After that, each dollar earned will increase the standard deduction by a dollar (essentially making the earnings tax-free), until your child earns $5,700 – the amount that would be allowed as a deduction if your child were not a dependent.