If your high school or college aged child needs to file a tax return only to have federal or state income taxes withheld from their pay refunded, then why not file for free? For federal taxes, this generally applies to dependents who earned no more than $12,550 (in 2021) unless they also have investment income exceeding $350.
Even if your child earns more than $12,550, if the only income is from W-2 wages, then please take advantage of the IRS’ free filing. Just be careful to check the box on Page 1 or their 1040 reflecting that the child can be claimed as your dependent or you might lose out on the valuable tax credit of $3k per child under the age of 17 (increased to $3.6k for kids 5 and under) or $500 per older dependent child.
While preparing your child’s tax returns, please consider contributing the lesser of your child’s gross wages or $6,000 into a Roth IRA for your child. Think decades of tax-free compounded growth on those contributions. The due date to contribute to an IRA for 2021 is 4/15/22.
If a child is filing a tax return to report significant investment income, however, the overly complex Kiddie Tax rules might deter even the most tax-savvy parents from trying to file for their kids using the free software.
And if you do have a working child who won’t earn more than $12,950 in wages during 2022, please instruct your child to claim Exempt on the new W4 form to avoid the need to file a tax return for that child next winter only to get a refund of federal taxes that didn’t otherwise need to be withheld. Here are the instructions for your child to claim exempt:
Exemption from withholding. You may claim exemption from withholding for 2022 if you meet both of the following conditions: you had no federal income tax liability in 2021 and you expect to have no federal income tax liability in 2022. To claim exemption from withholding, certify that you meet both of the conditions above by writing “Exempt” on Form W-4 in the space below Step 4(c). Then, complete Steps 1(a), 1(b), and 5. Do not complete any other steps.