Does Your Minor Child Need to File Tax Returns? 7 Strong Reasons to Do So!

Taxes are an eventuality in everyone’s life. Regardless of what we do – a job, business, or shopping- we pay taxes to the government. First of all, congratulations If your minor child earns through a part-time job, a side hustle or a business. They are already on their way to grow as responsible and successful citizens. Minors may or may not need to pay income tax, depending on their income. However, regardless of their income and age, they must file tax returns. It may benefit them to file tax returns in the long run in more ways than one. Therefore, we recommend you file an income tax return for your child, regardless of age and income.

Do Minors Pay Income Tax or File a Return?

Each country has requirements on who must file and pay income tax. There is no minimum age to file an income tax return in the USA or Canada. The law suggests that individuals (including children), regardless of age, must file and pay income tax if their earnings exceed the basic personal exemption amount. For Canada, that amount was $15,000 for 2023. For the US, the amount is $13,850 for 2023. If your child gets a T4 or a W2 exceeding these amounts while working, they must file tax returns and pay income taxes. Depending on your child’s situation, determine whether you need to file as per the guidelines set by Canada and the US.

What should you do if your child’s earnings are less than the exemption amount? If their earnings are less than the exemption amount, they may not owe any taxes. However, we believe that they should still file taxes as there are multiple benefits to doing so. Here are seven compelling reasons to do so.

7 Reasons for Your Child to File an Income Tax Return

Your Child May be Eligible for a Refund

Who doesn’t like getting money from the Government? If your child worked through the year and got a T4 or W2, chances are they would have got some standardized contributions automatically deducted from their Gross Pay. Such deductions include the Federal Tax, Canadian Pension Plan (CPP) or Employment Insurance (EI) in Canada. In the USA, they may have been subjected to deductions for Medicare, Social Security Tax, etc. Depending on their total earned income, they may be eligible for a refund of these deductions when filing a tax return. By filing an income tax return, your child may get their hard-earned money back from the Government.

Get a Head Start on RRSP or IRA Contribution Room

While getting a check or a direct deposit of a refund is quite enticing, filing a tax return also helps your child build contribution room for RRSP and start contributing to it. As we know, RRSP has no minimum age requirement, so filing a tax return can help them kick-start their journey toward their first home or post-secondary education. For example, if your 15-year-old earns $2000, they will get a contribution room of $360 for the year. This contribution room can be carried over to later ages. This is significantly beneficial when they start earning more, as it can be used to lower their tax. Furthermore, once they are ready, they can use RRSP towards a zero percent loan for their first home purchase or post-secondary education if they have sufficient RRSP contributions.

Government Credits, Social Security and Other Benefits

A significant advantage of your child filing an income tax is registering with the CRA or IRS. This is critical as some government benefits, such as HST/ GST or benefits rolled out during the pandemic, are contingent upon individuals being registered with CRA and filing taxes. Therefore, it is essential that your child files taxes. This will make them eligible to receive HST/ GST credit as soon as they turn 19, subject to meeting income requirements. In the US, minors attending college or vocational school may be eligible for education-related tax credits or deductions. Filing a tax return allows them to claim benefits such as the American Opportunity Credit or the Lifetime Learning Credit.

Raise Financially Responsible Individuals

If you think about it, filing tax returns and paying income tax is an eventuality. By filing taxes at an early age, your child will gain some valuable life skills. These include learning basic terms such as deductions, credits, and the importance of taxes and filing them on time. Since their tax filing will be pretty straightforward in most cases, it gives them an excellent opportunity to understand the overall process without getting into a steep learning curve. Most importantly, filing their taxes at a young age will make them confident about handling their taxes as they grow into adulthood. Being able to file their taxes on their own will go a long way in helping them understand and identify ways to optimize their wealth.

Increase Possible Savings and Refund for the Family

As your children start filing taxes, it is recommended that you file tax returns as a family. This will allow the highest-earning family member to increase their possible savings and refunds. You can lower your tax liability by claiming your child’s medical expenses or charitable donations. The same holds for moving expenses for tuition and post-secondary school tuition. Having your minor child file taxes with you gives you the maximum possible refund or credits as a family. On the flip side, you, as a parent, will not be required to pay taxes on their income and still claim them as dependent if they are less than 18 years of age.

Build their tax-history

As your children grow into adulthood, they will apply for jobs, car loans, etc. Having a proven track record of tax history goes a long way in facilitating these applications. The tax filing history can give them a head start on these applications as proof of income through their younger years.

It’s Free!

Finally, filing taxes for straightforward scenarios is free. There are multiple options for your minor child to file and pay taxes without incurring any cost. In all likelihood, the tax preparation and filing for children will be straightforward without multiple income sources or investment income. This makes it easy to use free services provided by CRA, the IRS, or companies like TurboTax, WealthSimple, etc., to file their taxes.