CARL WATTS & ASSOCIATES

June 13, 2016

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The Kiddie Tax

The child is required to file a tax return for the tax year;


The child does not file a joint return for the tax year.

A child required to file Form 8615 may be subject to the Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of the child's modified adjusted gross income (MAGI) over a threshold amount. Use Form 8960, Net Investment Income Tax, to figure this tax.


As a parent, you may be able to avoid having to file a tax return for the child by including the child's income on your tax return. To make this election, attach Form 8814, Parents' Election to Report Child's Interest and Dividends, to your Form 1040 or Form 1040NR when:

  1. At the end of the tax year the child was under age 19 or under age 24, if a full-time student;

  2. The child's interest and dividend income was less than $10,500 for the tax year;

  3. The child had income only from interest and dividends, which includes Alaska Permanent Fund dividends and capital gain distributions;

  4. No estimated tax payments were made for the tax year, and no prior tax year's tax overpayment was applied to the current tax year estimated tax, under the child's name and social security number;

  5. No federal income tax was withheld from the child's income under backup withholding;

  6. The child is required to file a return unless the parent makes this election;

  7. The child does not file a joint return for the tax year;

  8. The parent is the parent qualified to make the election or files a joint return with the child's other parent.


Form 8615 can get quite complicated, especially if parents are separated or unmarried, since the higher tax rate needs to apply. You can find extensive instructions, information, filing requirements and examples on the IRS website, Publication 929 Tax Rules for Children and Dependents.


The IRS considers any taxable income a child earns as the child’s, but in the end, the parent is liable for filing the return and for any taxes owed on the taxable income. Deductions may be claimed on the child’s tax return, even if the expenses may have been paid by the parent.

Keep in mind that, when you add your child's income to your return, the extra money could mean the loss (or at least a reduced benefit) of some tax deductions and credits that are phased out as income grows. Therefore it is better to run the numbers on both Form 8615 and Form 8814 to guarantee that you and your child pay the least possible tax on the youngster's investment earnings. If you have more than one child with unearned income, you must repeat this process for each child.


Also, pay attention to the IRS instructions on determining your child's age. The IRS tax year is slightly different than the calendar year when it comes to the kiddie tax.

It is, of course, our recommendation that you consult a professional to make sure all options are considered and suitable tax-planning is in place to reduce the kiddie tax to the minimum allowable.

Only a week ago, in our previous newsletter, we briefed you on what you need to know about your child’s earned income. But, what happens if your child has unearned income or investment income? Well, this is when the Kiddie Tax comes into play.

Created in 1986, the Kiddie Tax was conceived to keep parents from sheltering income by putting accounts in the name of their children for a lower tax rate. At one time, it only applied to children under age 14 and that's how it got its name.

Types of unearned income which may be taxed under this rule include stocks, mutual funds, investment income and capital gains, taxable Social Security benefits, annuities, rents, royalties.

Generally, your child is affected by the Kiddie Tax if their unearned income exceeds $2,100 and they are:

  • Under age 18 at the end of the year;
  • Age 18 at the end of the year, with earned income that is less than (or equal to) half of their support for the year; or

  • Age 19-23 at the end of the year, with earned income that is less than (or equal to) half their support, and they are full-time students.


Remember though, that your child would not be subject to the Kiddie Tax if:

  • They only had earned income;
  • They are not required to file because their income is below the filing threshold;

  • They are filing jointly.


There are two rules that may affect the tax and reporting of the unearned income of certain children:

  1. If the child's interest, dividends, and other unearned income total more than $2,100, part of that income may be subject to tax at the parent's tax rate instead of the child's tax rate, or

  2. If the child's only income is interest and dividend income (including capital gain distributions) and totals less than $10,500, the child's parent may be able to elect to include that income on the parent's return rather than file a return for the child.

For either rule to apply, the child must be required to file a return.

You can figure the child's tax on Form 8615, Tax for Certain Children Who Have Unearned Income, and attach it to the child's tax return when:


The child's unearned income was more than $2,100;


The child meets one of the following age requirements:

The child was under age 18 at the end of the tax year,

The child was age 18 but less than 19 at the end of the tax year and the child's earned income did not exceed one-half of the child's own support for the year (excluding scholarships if the child was a full-time student), or

The child was a full-time student who was at least 19 and under age 24 at the end of the tax year and the child's earned income did not exceed one-half of the child's own support for the year (excluding scholarships)


At least one of the child's parents was alive at the end of the tax year;


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