As a dependent child, the IRS imposes specific rules to determine the maximum salary you can earn and still have no taxes to pay. In most cases, you will have to pay taxes on much lower salaries than most other taxpayers do. However, you should also be aware of a different set of IRS rules you are subject to when you have income other than your salary, such as from investments.
General Tax Rules
To understand why as a dependent you may have to pay taxes on more of your salary income, you need to be familiar with the tax filing and payment rules the IRS imposes on taxpayers who are not dependents. In general, these taxpayers can earn a maximum salary equal to the sum of their standard deduction plus one exemption without having to pay any tax. When they earn above this amount, a tax return is necessary. However, the filing doesn’t mean that they have to pay tax on 100 percent of their salary; rather, only the amount of salary that exceeds the standard deduction plus exemption is potentially subject to tax if they don’t qualify for additional deductions and tax credits.
Implications for Dependents
As a dependent, your salary is subject to the same rules except that you cannot claim a personal exemption on your own return since in most cases your parents already claim it for you. And since the maximum standard deduction you can claim is the same as a single taxpayer, this represents the maximum amount of salary you can earn that is not subject to tax and doesn’t require you to file a return. In 2011 for example, the single standard deduction is $5,800, which means that if you earn $5,801, you must file a tax return and pay income tax on the excess, which in this case is only $1.
Dependent Investment Income
If you are a dependent child who earns investment income, then the maximum amount you can earn without paying tax drops significantly. As of 2011, the IRS will require you to file a return when the amount of investment income you receive exceeds $950. Additionally, you will have to pay tax on the excess. Typically, this investment income includes the interest you earn from a savings or other investment account and the dividends you earn from a stock portfolio.
In the event your only source of income is from investments, and the total is sufficiently high to require a tax return, then your parents, or any other person who claims you as a dependent, can elect to include that income on their own return. However, your parent will still have to pay tax on amounts over $950, and in some cases, the tax rate may be higher depending on their own level of taxable income.