American Dream

How Can Kids Make Money? What Parents Need to Know About Taxes and Investments

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How can kids make money, and how does it affect you as the parent? Whether your child has received a large monetary gift from a living relative or an inheritance, or begins earning money through a part-time job, understanding the legal and tax implications should help you plan accordingly.

Receiving Money as a Gift

Regardless of your child’s age, if they receive a gift of money from a relative or anyone else that exceeds the annual exclusion limit, the donor (person who gives the gift) will generally pay tax on it. As of 2015, the IRS has set the exclusion limit at $14,000 per person, or $28,000 per couple. For example, your child may receive a gift of $30,000 from their grandparents. Because it’s from a couple, $28,000 is tax free, but the grandparents must pay tax on the remaining $2,000.

Receiving Money as an Inheritance

If your child receives an inheritance, they must wait until they reach the age of majority (either 18 or 21 depending on your state of residency) to receive it. How to handle this inheritance depends on where you live and, in some cases, how much the child receives.

Many states have enacted the Uniform Transfer to Minors Act (UTMA), which allows individuals to leave an inheritance for a minor child under the control of a named custodian. The named custodian, which can be you or your spouse, makes decisions regarding how to invest the money and/or what to spend it on. However, your state may have additional provisions for different circumstances. For example, in California, if a minor child inherits less than $5,000, the money may be held in trust by a parent until the child reaches the age of 18, reports the Superior Court of California.

Making Money From a Job

Once kids start earning money, whether they have a paper route or a few shifts each week at a local pizza place, it’s a good time to teach them some basic money management lessons. If you haven’t already done so, help them open their first bank account and split their take-home pay between savings and spending money. If your child’s earned income is greater than $6,200 for the year, the IRS says they’ll have to file a tax return, so this is a good time to introduce them to the basics of taxes in the United States.

Don’t worry—as long as your child provides less than half of their financial support from their own earned income, you can still claim them as a dependent for tax purposes.

Making Money From Investments

How can kids make money from investments, you ask? Well, in the same ways adults can: through interest, dividend earnings, and capital gains distributions from investments held in their own name or via a UTMA account. An adult custodian trades stock through this account on behalf of a minor beneficiary until they reach majority, as mentioned above. Kids may be subject to taxes on these investment earnings, though in certain circumstances the earnings may be taxed at the parent’s rate as a “kiddie tax.”

If you expect your child will have money of their own in the near future, whether by gift, inheritance, earned income, or investment income, it’s a good idea to learn the tax and investment options early on. For more information on the tax implications of children’s income, see IRS Publication 929: Tax Rules for Children and Dependents.

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Sarita Harbour is a freelance writer specializing in personal finance, entrepreneurship, and green living. As a former financial adviser with over a decade of banking experience, she has been writing for American and Canadian digital audiences for the past three years. Her work is featured regularly on Capital One's Spark Business IQ, Forbes, and The Lending Tree, and also appears on sites such as Fox News, Yahoo! Homes, Bob Vila, Equifax Insights for Small Business, and Intuit Small Business. Sarita graduated from the University of Guelph where she studied Psychology and Computer Science, and she holds the Personal Financial Planning designation from the Institute of Canadian Bankers. Sarita is also a member of the Professional Writers Association of Canada. She lives with her family in an off-the-grid cabin outside of Yellowknife, NWT.