CARL WATTS & ASSOCIATES
May 23th, 2011
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Washington DC
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tel/fax 202 350-9002 |
Child Investment Income
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If any of the following conditions apply, the child needs to file a return:
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If your child is under 19 years old (24 if a full-time student) and their only income is unearned income totaling less than $9,500, the income may be reported directly on your return, using IRS Form 8814.
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To figure out and report your child’s investment income if the Kiddie Tax applies, you must use IRS Form 8615, which is the child’s tax return for investment income and needs to be attached to the child’s Form 1040 or Form 1040A. The first $1,900 will be taxed at your child’s tax rate, which is usually 10%, and the remaining investment income is taxed at the parents tax rate.
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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.
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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.
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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.
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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.
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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.
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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.
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Your children may have income for many reasons, they may have interest, dividends, capital gains, or even have a job.
Unearned income, such as that gained from investments, is considered separate from earned income, although it is taxable income as well. The questions that most probably come to your mind are: how do you report your child’s income and how is it taxed?  |
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The IRS rules that if your dependent child has unearned income of more than $1,900 then there are two options:
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And here is where 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.
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The marginal tax rate is the amount of tax paid on an additional dollar of income. As your income increases, the marginal tax rate increases but only for that portion of your income within the higher bracket.
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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.
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For the Kiddie Tax rule to apply, all of the following conditions have to be met:
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