The "kiddie" tax has been
part of the Internal Revenue Code (IRC) since 1986. In recent years
Congress has increased the number of individuals subject to the kiddie
tax rules in order to balance several tax decreases.
The kiddie tax rules are
applied to individuals who are claimed as dependents --- usually
But the kiddie tax
rules do not apply if:
• a dependent child is not
required to file a tax return; that is, if the child has less than a
$950 income threshold for unearned income during 2009. Note that
unearned income consists of interest, dividends and capital gains; or
neither of the child's
parents is alive at the end of the tax year; or
the child's earned
income - salary, wages or self-employment income - exceeds half of
his or her support; or
the child is married and
files a joint return.
The kiddie tax rules
apply for tax year 2009 if:
at the end of 2009, the child is either: (a)
under age 18, or (b) age 18 (or a full-time student age 19-23) and
has earned income less than or equal to half of the child's support;
the child has more than $1,900 of investment
income for the year;
either parent was alive on Dec. 31, 2009; or
the child does not file a joint tax return for
tax year 2009.
A child's investment
income is defined as follows:
Total Income - Earned
Income = Investment Income
For 2009, a child's
investment income is first reduced by a $950 standard deduction. The
next $950 is taxed at the child's tax rate and the remainder is taxed at
the parents' tax rate.
The following table
summarizes the tax treatment of a dependent child's income for the year
There are two ways that
a child can file a tax return in order to report potentially taxable
• Child files a separate tax
return. In that case, IRS Form 8615, Tax for Certain
Children who have Investment Income of More Than $1,900,
must be completed and attached to the child's Form 1040. If there is
more than one child in a family subject to the kiddie tax, then the
investment income of all such children is combined with the income of
the parents to determine the tax liability.
If the child cannot sign the
tax return, then either parent may sign the child's name in the
appropriate space. The notation "by, (parent's signature), parent for
• If certain requirements
are met, then parents of a child who is subject to the kiddie tax may
elect to report the child's income on the parents' tax return.
Form 8814, Parents' Election to Report Child's Interest and
Dividends, would have to be completed and included with the
parents' tax return. This option is available only if all of the
following conditions are met: (1) the child's only income is from
interest, dividend and /or capital gain distributions; (2) the child's
total income for the year is less than $9,500; (3) no overpayments are
applied to the child's current year return; and (4) no estimated or
withholding tax has been paid in the child's name.
What are the advantages
of reporting a child's income on the parent's tax return?
The advantages include:
no need to file a separate tax return for the
the first $1,900 of the child's investment
income is taxed on form 8814 and is not included in the parents'
taxable income; and
in states that base the parents state taxable
income on federal taxable income, lower state tax liability could
What are the
disadvantages of reporting the child's income on the parents' tax
The disadvantages include:
higher adjusted gross income (AGI) for the
parents, resulting in the possible loss of tax credits and
deductions. Higher AGI could also result in a larger state tax
liability for parents who live in states in which the state tax
liability is based on the federal AGI; and
greater tax on the child's income. When using
form 8814, the child's first $950 of income is taxed at 10 percent.
If this income consists of capital gain distributions or qualified
dividends, the applicable tax rate on a separate return for the
child may be zero percent. Reporting a child's income on the
parent's tax return and using Form 8814 to compute the child's tax
may result in as much as $95 (10% of $9,500) in additional taxes.
Finally, the Small Business
and Work Opportunity Act of 2007 made significant changes to the kiddie
tax by expanding the tax to additional individuals when all of the
following conditions apply:
Children age 18 and younger; children age 23
and younger who are full-time students (until this law change, the
kiddie tax rules applied only to children age 17 and younger);
The child's earned income does not exceed half
of his or her support for the tax year. Scholarships are not
included when determining whether a child is providing at least half
of his or her support.
The child has at least one living parent at
the close of the tax year; and
The child does not file a joint return for the
Parents also need to be
aware that some children may be subject to the Alternative Minimum Tax
(AMT). The AMT exemption for a child whose investment income is taxed at
the parent's tax rate is $6,700 for 2009. IRS Form 6251 (used to compute
the AMT) should be prepared in the event a child's investment is greater
than $6,700 and therefore subject to the AMT.
The following was issued by the IRS in March 2011.
What Parents Should
Know about Their Child’s Investment Income
Parents need to be aware of the tax rules that
affect their children’s investment income. Here are four facts
from the IRS that will help parents determine whether their
child’s investment income will be taxed at the parents’ rate or
the child’s rate:
1. Investment Income Children with
investment income may have part or all of this income taxed at
their parents’ tax rate rather than at the child’s rate.
Investment income includes interest, dividends, capital gains
and other unearned income.
2. Age Requirement The child’s tax must be
figured using the parents’ rates if the child has investment
income of more than $1,900 and meets one of three age
requirements for 2010:
- Was under age 18 at the end of the year,
- Was age 18 at the end of the year and did not have
earned income that was more than half of his or her support,
- Was a full-time student over age 18 and under age 24 at
the end of the year and did not have earned income that was
more than half of his or her support.
3. Form 8615 To figure the child's tax using
the parents’ rate for the child’s return, fill out Form 8615,
Tax for Certain Children Who Have Investment Income of More Than
$1,900, and attach it to the child's federal income tax return.
4. Form 8814 When certain conditions are
met, a parent may be able to avoid having to file a tax return
for the child by including the child’s income on the parent’s
tax return. In this situation, the parent would file Form 8814,
Parents' Election To Report Child's Interest and Dividends.
More information can be found in IRS Publication 929, Tax
Rules for Children and Dependents. This publication and Forms
8615 and 8814 are available at
http://www.irs.gov or by calling 800-TAX-FORM
- Form 8615, Tax for Certain Children Who Have Investment
Income of More Than $1,900 (PDF
- Form 8615, Instructions (PDF
- Form 8814, Parent's Election to Report Child's Interest
and Dividends (PDF
- Publication 929, Tax Rules for Children and Dependents (PDF