Dependent Income and Taxes
Dependents who are single must file their own income tax returns if their earned income is greater than the standard deduction ($5,950 for 2012). If a dependent does not earn more than the standard deduction amount then no return is required. However, they might want to file to get any refund of taxes withheld.
A dependent must also file a tax return if they receive a minimum level of unearned income in the year. Dependents with unearned income exceeding $950 must file a tax return. Unearned income usually comes from investments. Anyone, even a dependent, who makes more than $400 in self-employment income must file a tax return.
Investment income of children can affect the tax return of the parents. A child’s interest and dividend income that is less than $9,500 can be included on the parent’s tax return rather than having the child file their own tax return. Investment income greater than $1,900, will be taxed at the parent's tax rate rather than the child's tax rate. The child must file their own tax return if the investment income is greater than $9,500.
More information regarding Children and taxes is available from the IRS Publication 929, Tax Rules for Children and Dependents.