Earned income vs. unearned income: why it matters
The IRS applies different thresholds depending on where a dependent’s money comes from, so the type of income matters as much as the amount:
| Income type | Threshold |
|---|---|
| Earned income only (wages, tips, self-employment) | More than $16,100 for tax year 2026 ($15,750 for 2025) |
| Unearned income only (interest, dividends, capital gains) | More than $1,350 (for 2025 and 2026) |
| Combined earned and unearned income | The greater of $1,350 or earned income (up to $16,100) plus $450 |
A dependent’s standard deduction follows a related but separate formula: for 2026, it’s the greater of $1,350 or the dependent’s earned income plus $450, capped at the regular standard deduction for their filing status: $16,100 ($15,750 for 2025).
When a dependent must file a separate return
- Earned income above the threshold: Wages from a job or net self-employment income that pushes total earned income over $16,100 for the 2026 tax year.
- Unearned income above the threshold: Interest, dividends, capital gains, or similar investment income, common with a custodial brokerage account, exceeding $1,350.
- Net self-employment earnings of $400 or more: This threshold applies on its own, regardless of total income, and can also trigger self-employment tax.
Being claimed as a dependent on someone else’s return doesn’t create an exception to any of these thresholds. A dependent’s own filing requirement is separate from whether a parent can claim them.
The parental election: reporting a child’s income on your return
In some cases, parents can skip filing a separate return for their child altogether. If a child’s unearned income consists only of interest, dividends, and capital gain distributions, and that income falls under a set annual limit, a parent can elect to report it directly on their own return using Form 8814, Parents’ Election To Report Child’s Interest and Dividends.
This election is a convenience, not automatically a savings. Including a child’s income on the parent’s return can push the parent into a higher bracket or affect income-based phaseouts in ways that filing a separate return for the child wouldn’t. It’s worth running the numbers both ways rather than assuming the election is the simpler or cheaper path.
The Kiddie Tax
Separately from the filing-threshold question, the Kiddie Tax can affect how a dependent’s investment income is actually taxed if they are a child meeting specific age tests, generally under 18 years of age. Once a child’s unearned income exceeds $2,700, a threshold that holds for both 2025 and 2026, the amount above that threshold is generally taxed at the parent’s marginal rate rather than the child’s own, usually lower rate, using Form 8615, Tax for Certain Children Who Have Unearned Income.
The kiddie tax applies whether the child files their own return or the parent uses the Form 8814 election. It’s a separate calculation layered on top of the basic filing-requirement rules, designed to prevent families from shifting large amounts of investment income into a child’s name purely to have it taxed at a lower rate.
Whether a dependent should file even if not required
Falling under every threshold above doesn’t mean filing is pointless. Common reasons to file anyway:
- Refund of withheld taxes: If federal tax was withheld from a dependent’s paycheck, filing is the only way to get that money back.
- Building a filing history: For older teens and young adults, filing even a simple return establishes a record that can simplify future filings, loan applications, and financial aid paperwork.
