Dependent earned over $2500 in 2021 and opened a Roth. Do they file their own 1040? Does this mean parents lose the $500 dependent credit?

[DianeW777]

No the parents will not lose the other dependent credit if they are the qualifying dependent of the parent. See the article for the requirements.

• Who is a qualifying dependent?

A return is not required for your child if that is all the income they earned.  Also, you don't have to report your contribution to a Roth IRA; however, you may want to input it into TurboTax so you can track your basis.   In order to avoid paying taxes on the earnings, it’s necessary to leave your contributions in your Roth IRA for at least five years.

To enter a Roth IRA contribution go to:

1. Federal Taxes > Deductions & Credits
2. Scroll down to "Retirement and Investments"

3. Select "Traditional and Roth IRA Contributions"

4. Continue with the interview to enter your Roth IRA contribution

You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Roth IRAs do not require withdrawals until after the death of the owner.

[Edited: 02/01/2022 | 1:55p PST]

[anonymouse1]

She turned 18 at the end of 2021 and had a summer job but is still in high school.  The employer withheld $2.57 in federal taxes and none in state (but did withhold OASDI and Medicare).  According to Pub 929, it looks like she doesn't even need to file (but that doesn't address the Roth).  I am being given an option to claim her income on our joint return - but is that only for unearned income?

[DaveF1006]

No, she will not be required to file a tax return to report her Roth contribution.

[anonymouse1]

So I can just give her $3 in lieu of filing to get her withholding back, and just not bother filing anything for her earned income (she only earned a few cents in interest on a bank account)?

[ErnieS0 · Accepted solution]

If your dependent's only income was $2,500 from a W-2 plus a few cents interest, then they do not have to file a tax return.

Your child will file a return if:

• They had only unearned income (interest, dividends, capital gains) of more than $1,100;
• They had only earned income (wages, salaries, tips, fees) of more than $12,550; or
• They were self-employed with $400 or more income.

In cases of mixed income (earned and unearned), file a return if:

• Unearned income was more than $350, and gross income of more than $1,100, or
• Unearned income was $350 or less, and gross income of more than $12,500

The IRS has an app (Do I Need to File a Tax Return?) to help you decide whether to file a tax return.

[anonymouse1]

Just to clarify - she doesn't need to file a return since she is well under the income limit for both earned and unearned income, but do we have to claim her earned income (and the few cents of unearned income that she earned on an account that we are joint owners of) on our MFJ return?

[MarilynG1 · Accepted solution]

You don't have to report her Earned Income on your return.  

Since you are joint owners of a savings account, you could report any interest earned on your return (her Unearned Income). 

Click this link for more detailed info on Reporting Dependent Income.