Does my child need to file taxes?
Example: Two Dutch parents have a child that was born in the US. The child has a US passport. When does the child need to file taxes and/or an FBAR?
In short: A child needs to start filing taxes when it makes money. Depending on the height and type of the income your child would also owe taxes. Usually when abroad no tax is owed because of exclusions and tax paid in the country of residence. Besides filing tax returns your child might need to file an FBAR if it has bank account abroad. See more for a step-by-step explanation:
Step 1:
Determine if there is a filing requirement. The IRS has a clear explanation on their site. In the example they talk about earned and unearned income which basically means active or passive income. Check IRS Filing requirements.
Step 2:
If you don’t need to file you can skip this step and go to step 3. If you do need to file you may be able to benefit from Foreign income exclusions.which applies on earned income. This means that you benefit from an amount that is tax free when you live abroad. Do note that children often do not work and don’t generate earned income but do generate unearned income which would make a foreign income exclusion not applicable.
Foreign tax credit
If your child generates income that isn’t eligible for the exclusion it might also benefit from a foreign tax credit: ‘If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.’
Step 3:
We discussed tax filing but an individual must also report their bank accounts in an FBAR. If you (or your child) had an account of which the aggregate value is over $10.000,- you need to file an FBAR. For more information: What is the FBAR.
This is meant as a helpful guideline but by no means should you take any action based on this advice. We always recommend to consult a tax expert.
