Like any other income, a child’s investment income is also subject to taxation. However, it may be subject to either the parent’s rate or the child’s. Under certain conditions, parents maybe able to avoid having to file tax returns by including the child’s income on the parent’s tax return.

The first thing a parent must do is determine how much money their children made and whether the income would be taxed at parent’s rate or at the child’s rate. Children 14 years of age may have to file a separate income tax return just like an adult but won’t be able to claim exemption as he is likely to be reported as a dependent.

The following four facts issued by the IRS 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 meet one of three age requirements for 2009:

• The child was born after January 1, 1992.
• The child was born after January 1, 1991, and before January 2, 1992, and has earned income that does not exceed one-half of their own support for the year.
• The child was born after January 1, 1986, and before January 2, 1991, and a full-time student with earned income that does not exceed one-half of the child’s support for the year.

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.

Different forms are available according to your child’s circumstance and you must make sure you filled out the right ones. 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 IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Bookmark this page