Under the “kiddie tax,” rules part of a child's investment income may be subject to tax at the parent's highest marginal tax rate if:
The child is:
under age 18 at the end of the year, or
age 18 at the end of the year if the child's earned income did not exceed more than one-half of the amount of his or her support, or
over the age of 18 and under the age of 24 at the end of the year, if the child was a full-time student whose earned income doesn't exceed more than one-half of the amount of his or her support.
The child's investment income for the appropriate tax year exceeded the investment income limit for the tax year which is $1,900 for 2010. Investment income is generally defined as "unearned income" and includes interest, dividends (including Alaska Permanent Fund dividends), capital gain distributions, etc.
The child is required to file a tax return for the tax year.
At least one of the child's parents is alive at the end of the tax year.
The child does not file a joint return for the tax year.
For purposes of these rules, the term "child" includes a legally adopted child and a stepchild. These rules apply whether or not the child is a dependent.
January 1st birthdays: A child born on January 1 is treated as having reached that age on the last day of the prior year. For example, a child born on January 1, 1991 celebrates his 19th birthday on January 1, 2010. However, he is treated as having reached age 19 on December 31, 2009, and therefore is age 19 for tax year 2009.
Generally, a child's unearned income is taxed as follows:
The first $950 (equal to the dependent’s standard deduction) of the child’s income is not taxable.
The next $950 is taxed at the child’s rate.
Any income in excess of $1,900 is taxed at the parent’s rate.
You can report a child’s investment income on either your tax return, if certain conditions apply, or your child’s tax return. When you report a child’s investment income on your return, you must file Form 8814 along with your return. Our Interview topic, Child’s Income on Your Return (Form 8814), will help you do this. Just click Take Me To and go to Income. Scroll to Child’s Income on Your Return (Form 8814) and click Go To.
To qualify to use Form 8814 to report the child's income, the following requirements must be met:
The child's income must consist of only interest, dividends, and capital gain distributions totaling more than $950 and less than $9,500.
The child did not make estimated tax payments in the name or taxpayer identification number of the child.
The child did not apply an overpayment from the prior year return to the current year return under the child's name or taxpayer identification number.
The income of the child was not subject to backup withholding that was deducted from the child's income.
When you report your child’s investment income on a separate return, you will need to use Form 1040 (or Form 1040A, if applicable) and include Form 8615. Form 8615 is included to show the tax computation using the parent’s highest marginal tax rate.
If your child has earned income or received proceeds from the sale of stock (reported on Form 1099-B), you must file a separate return for your child and use Form 8615 to compute the tax on your child’s income. You don’t have to make the same choice for all your children, though you can file Form 8814 for one child and Form 8615 for another
If your child has only a small amount of interest and/or dividend income to report, the convenience of reporting your child’s income on your return might make sense for you. However, you might be missing out on the benefit of the child’s lower tax rates.
For details about each option, see Reporting Your Child’s Income on Your Return and Children and Investment Income.