Tax Tip: Guidelines for Handling a Child’s Investment Income
Does your child have investment income? If so, there are tax rules that affect their investments and their tax rate. Several factors are used to determine whether a child’s investment income will be taxed at the child’s rate or the parents’ rate.
Interest, dividends, capital gains, and other unearned income are considered investment income. All or part of a child’s investments could be taxed at the parent’s tax rate.
Guidelines for Taxing at Parents’ Rates
If a child has investment income of more than $1,900 and meets one of three of the following age requirements, then the child’s tax must be figured using the parent’s tax rate.
- The child was under age 18 at the end of 2011
- The child was under age 18 at the end of 2011 and did not have earned income that supported more than half of their living expenses.
- The child was a full time student over age 18 but under age 24 at the end of 2011, and did not have earned income that supported more than half of their living expenses.
Figuring the Child’s Rate at the Parents’ Rate
If you do need to figure the child’s tax rate at the parents’ rate you will need to complete Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to their federal income tax return.
Guidelines for Including Child’s Investment Income on Parents’ Tax Return
Under certain conditions, a parent may be able to include their child’s investment income on their tax return. If eligibility is met, then the child does not need to file a return. The conditions are as follows:
- The child was under age 19, or under age 24 if they are a full-time student, at the end of 2011. (Please note a child is considered to be 19 at the end of 2011 if they were born on January 1, 1993, and 24 if born on January 1, 1988.)
- The child’s only income was from interest and dividends, and their gross income was under $9,500.
- If you report your child’s investment income, then they will not have any returns to file.
- The child does not file as a joint return for 2011.
- The child did not make an estimated tax payment for 2011, and no overpayment was received for 2010 under their name and social security number.
- Federal income tax was not taken out of the child’s income due to the backup withholdings rule.
- You are the parent whose return must be used when applying for the special tax rules for children.
If your child meets these qualifications you may claim their investment income by completing and attaching Form 8814, Parents’ Election to Report Child’s Interest and Dividends, to your 1040.
For More Information
If you need more information contact your H&S tax professional at 1.800.924.6891.
Sources & Forms (External Links)
Tax Topic 553 – Tax on a Child’s Investment Income
Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900
Form 8814, Parents’ Election to Report Child’s Interest and Dividends target=”_blank”>
Publication 929 (2011), Tax Rules for Children and Dependents