Kiddie Tax

Under the kiddie tax rules, part of a child´s investment income might 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
  • Age 18 at the end of the year – and the child´s earned income wasn´t more than half of his or her support
  • Over age 18 and under age 24 at the end of the year – and the child was a full-time student whose earned income wasn´t more than half of his or her support

The child´s investment income was more than the investment income limit of $2,100 for 2016. Investment income is unearned income like:

  • Interest
  • Dividends, including Alaska Permanent Fund dividends
  • Capital-gain distributions

The child is required to file a return.

  •  At least 1 of the child´s parents is alive at the end of the tax year.
  • The child doesn´t file a joint return.

For kiddie tax rules, the child includes a legally adopted child and a stepchild. The rules apply whether or not the child is a dependent.

If a child is born on Jan. 1, the IRS treats the child as having been the same age on December 31 of the previous year as he or she was on Jan. 1 of the current tax year.

A child´s unearned income is usually taxed as:

  • The first $1,050 – equal to the dependent´s standard deduction – of the child´s income isn´t taxable.
  • The next $1,050 is taxed at the child´s rate.
  • Any income that´s more than $2,100 is taxed at the parent´s rate.

Reporting a Child’s Unearned Income

 You can report a child´s unearned income on your return, if certain conditions apply, or on your child´s own return. If you report a child´s unearned income on your return, you must file Form 8814 along with your return.

To qualify to use Form 8814 to report the child´s income, all of these must apply:

  • The child´s income must be more than $1,050 and less than $10,500 after totaling Interest, Dividends and Capital-gain distributions.
  • The child didn´t make estimated tax payments in his or her name or taxpayer identification number.
  • The child didn´t apply an overpayment from the prior-year return to the current-year return under the child´s name or taxpayer identification number.
  • The child´s income wasn´t subject to backup withholding that was deducted from the child´s income.

If you report your child´s investment income on a separate return, you must use Form 1040 (or Form 1040A, if applicable) and include Form 8615. Form 8615 shows 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.
  •             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. You can file Form 8814 for 1 child and Form 8615 for another.

If your child has only a small amount of interest or dividend income to report, it might seem convenient to report your child´s income on your return. However, you might miss out on the benefit of the child´s lower tax rates.

See IRS Publication 503
See IRS Publication 929
See IRS Publication 972
See IRS Publication 3328