Can Your Child’s Tax Return Be Complicated?

Tax Tips

From reading a previous blog, “Does My Child Need to File a Tax Return”, you may have determined that your child needs to file a tax return.  Now we’re going to discuss how that child’s income is taxed.

If your child is under the age of 18 and has investment income (interest, dividends, capital gains, and other unearned income) that totals more than $1,700 for the year, your child’s income will be taxed by special rules. 

The 1st $850 of the investment income is tax free (reduced by a standard deduction of $850) and the next $850 is taxed as the child’s tax rate. The remainder of the investment income is taxed at the parent’s marginal tax rate, as if the parents had received the income. This is commonly referred to as the “kiddie tax.” You can tell that these rules eliminate the benefits of transferring investment income to the child in the hope of paying fewer taxes. Note: these rules do not apply to the child’s earned income such as wages.

In dealing with these special rules, the calculation of the child’s tax gets complicated.  If you’re using TurboTax, you don’t have to worry.  When TurboTax sees that the taxpayer (your child) is under 18, is claimed as a dependent, and has investment income over $1,700, the program will ask questions to fill out Form 8615. That’s the form used to figure out the child’s tax.

In the Child Income Section, TurboTax will ask for the parents’ names, social security numbers, filing status, taxable income, etc. If the child has siblings, the plot thickens.  All of the siblings’ investment income is combined with their parents’ income to determine the tax on a child’s return.  TurboTax will ask for similar tax information from the sibling’s Form 8615. Aren’t you glad that you aren’t filling out your children’s tax returns by hand?

If your head is whirling, there is another option.  Parents can elect to include a child’s unearned income on their tax return if the child:

·       The child is under age 18

·       The child only has investment income (no wages)

·       Child’s investment income is less than $8,500.

TurboTax will help you with this election.  Under the Child Income Section, the program will ask questions about your child’s income and if you would like to make such an election. If you do select this election, TurboTax will fill out Form 8814 that shows the child’s name, social security number and investment income. 

More information can be found in the IRS Publication 929, Tax Rules for Children and Dependents

Please add your comments ! 

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Comments (2) Leave your comment

  1. My daughter is 19, FT student and has earned income of about 6500.00 this past year. She does not pay any expenses I do. If I understand what Im reading she has to file her own tax return. I was told that I could add her income to my tax return but Im not sure how that works. Would it even be beneficial?

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