Due to the kiddie tax, a child’s investment income can be taxed at his or her parents’ marginal tax rate. If your child meets all the following conditions, you can report your child’s investment income on your tax return:
The child is subject to tax on investment income at the parent's highest marginal tax rate (kiddie tax). A child will be subject to the kiddie tax if the following are true:
The child meets the age requirement for the appropriate tax year:
For 2008 and later years, the child was:
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. 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.
The child's only income is from interest and dividends, including capital gain distributions and Alaska Permanent Fund (Permafund) dividends.
The child's gross income for the year in question is less than the investment income limit for the tax year and more than the dependent standard deduction determined without regard to earned income plus $300.
The child is required to file a tax return for the current tax year, unless the parent makes the election.
There are no estimated tax payments for the child in the current tax year, including any refund from the child's prior year tax return applied to current year estimated tax.
There is no federal income tax withheld from the child's income for the current tax year.
When you report a child’s investment income on your return, you must file Form 8814: Parents’ Election to Report Child’s Interest and Dividends along with your return. In addition, if you’re reporting the investment income of more than 1 child on your tax return, then you must file a separate Form 8814 for each child. 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.
If any of the requirements listed above aren't met, then you must file a separate return for your child and report your child’s investment income on Form 8615. For details, see Children and Investment Income.
You don’t have to make the same choice for all your children -- you can file Form 8814 for one child and Form 8615 for another.
A parent may desire to make the election to avoid the need to file a separate return or to make separate estimated tax payments for the child.
However, making the election may increase the parent's adjusted gross income, which affects the floor and ceiling for some of the parent's deductions and credits, including:
Itemized deductions
Personal exemptions
The child tax credit, education credits, EITC, and the credit for child and dependent care expenses
The deduction for contributions to a traditional IRA
The deduction for student loan interest.
Also, the parent may not take advantage of certain tax benefits belonging to the child. Specifically, if the election is made, the following deductions which the child could take on his or her own return may not be claimed on the parent's return:
The standard deduction for a blind child
The penalty on early withdrawal of any of the child's savings, and
Itemized deductions of the child, such as investment expenses or charitable contributions.
Note: If the parents make the election and the child received tax-exempt interest or exempt-interest dividends paid by a regulated investment company from certain private activity bonds, the parents must take that income into account as a tax preference item in determining if the parents owe alternative minimum tax.
Example: Let’s say you’re filing as head of household, your total income is $60,000, and the amount of student loan interest you paid is $2,500. As it stands now, you can deduct the full $2,500 and reduce your AGI by this amount. Suppose your child has interest income of $3,100 and you decide to report this interest on your return. By adding the $3,100 to your return, your total income will increase by $1,200 (this is the $3,100 less the $1,900 taxed separately on Form 8814) to $61,200, which will reduce the amount of student loan interest that you can deduct to $2,300.
The increase in AGI might also reduce the credits that you can take, such as the Child and Dependent Care Credit, child tax credit, Earned Income Credit, and education credits.
Example: Suppose that you and your spouse are filing a joint return, you have 2 children, your wages total $28,000, and you have dividends and interest totaling $2,400, which means that you qualify for the Earned Income Credit. And, let’s assume that 1 of your children has interest income of $3,000. If you add the child’s interest income of $3,000 to your return, you won’t qualify for the Earned Income Credit because the amount of investment income reported on the return will exceed the amount allowed. As a result, you’ll lose more than $2,000 in Earned Income Credit.
For more information, see Publication 929: Tax Rules for Children and Dependents.