Does Your Child Receive Investment Income? Be Sure to Follow IRS Reporting Rules
If your child receives investment income — such as interest, dividends, capital gains and other unearned income (for example, from a trust) — he or she must report it to the IRS by filing an income tax return. Whether your child is required to file his or her own tax return, or you, as the parent or guardian, can file on his or her behalf, depends on IRS rules. And, depending on the age of your child, the income may be subject to the “kiddie tax.”
The kiddie tax applies to children under age 19, as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income). It works by taxing a child’s unearned income beyond certain limits at his or her parents’ marginal rate. For 2014, a child’s first $1,000 of investment income is tax-free, the next $1,000 is taxed at the child’s rate and any excess over $2,000 is taxed at the parents’ marginal rate. The tax does not apply to children who are married and file jointly or to children who are not dependents (that is, whose earned income provides more than half of their support).
You may elect to report your child’s investment income on your tax return if his or her total interest and dividend income is less than $10,000 and the child is subject to the kiddie tax, has no other income of any kind and has not made any estimated tax payments. In this case, you must fill out Form 8814, “Parents’ Election to Report Child’s Interest and Dividends,” and attach it to your tax return. If this election is not made or your child’s investment income is $10,000 or more, he or she must file an income tax return and include Form 8615, “Tax for Certain Children Who Have Unearned Income,” as part of the return.
For more information on the kiddie tax and how to report your child’s income, contact Amanda Cenzer at 312.670.7444.