In early April, the Trump Administration unveiled its “Liberation Day” tariff plan, and it came as quite a shock, with the scope and severity of
Understanding When Parents Must Pay Taxes for Their Children
Published Date : April 30, 2025
The carefree days of summer camp for my children seem like long ago. My children, now teenagers, have summer jobs—and earned income—so the conversations around the dinner table range from saving, investing, and/or spending their earnings and taxes. TAXES, “gulp”, what?
Many parents assume that children are exempt from tax obligations, but this is not always the case. In certain situations, a child’s income may be subject to taxation, and parents must be mindful of these rules to avoid penalties and ensure compliance with tax laws. Whether it’s from earned income, investments, or gifts, parents should understand the circumstances under which their child may owe taxes and when they are responsible for reporting and paying them.
If a child earns income from a job, such as working at a retail store, babysitting, or doing freelance work, they may be required to file a tax return. According to IRS guidelines, a dependent child who earns more than the standard deduction for a single filer ($15,000 in 2025) must file a tax return. However, even if a child’s income is below this threshold, filing a return may still be beneficial if taxes were withheld and they are eligible for a refund.
Investment income, such as interest, dividends, and capital gains, can also be taxable for children. If a child’s unearned income exceeds $2,700 (as of 2025), the IRS applies the “kiddie tax”, which means the excess amount is taxed at the parents’ marginal tax rate instead of the child’s lower rate. This rule was designed to prevent parents from shifting large amounts of investment income to their children to take advantage of lower tax brackets.
In today’s digital age, many children and teenagers earn money from entrepreneurial activities such as YouTube channels, online stores, or gig economy jobs like dog walking or tutoring. If a child earns $400 or more from self-employment, they must file a tax return and pay self-employment tax, which covers Social Security and Medicare contributions. Parents should track their child’s earnings and ensure they comply with these requirements.
Another source of “income” for kids come in the form of gifts from parents and grandparents. Parents and grandparents often gift money to children, either directly or through custodial accounts like UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) accounts or trusts established for the child. While gifts themselves are not taxable to the child upon receipt, any interest, dividends, or capital gains generated by the gifted assets may be subject to taxation. If the child is the beneficiary of a trust, distributions may also trigger tax liabilities, depending on how the trust is structured.
Education-related funds, such as earnings from 529 plans, are typically tax-free if used for qualified education expenses. However, scholarships, grants, or fellowships that exceed tuition costs or are used for non-qualified expenses may be taxable. Parents should ensure they properly allocate education funds to minimize tax liabilities.
While children may not always owe taxes, parents must be mindful of tax rules related to their child’s income, investments, and financial gifts. Understanding these regulations can help parents avoid penalties, optimize tax savings, and ensure their child remains in good standing with the IRS. This may be a great opportunity to enhance your child’s financial literacy! Your Sand Hill Wealth Manager is also on deck to help with these conversations if that’s of interest to mom or dad! There’s a lot of ground to cover in financial literacy and it’s something we at Sand Hill are passionate about.
Source: www.irs.gov
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
Video Presentations
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
Recent Posts
