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Children and Investment Income

The kiddie tax might require a child's unearned income to be taxed at his or her parents' marginal tax rate. If your child has unearned income more than $2,000 , some of it will be taxed at your tax rate. This rule applies to children who:

  • Have more than $2,000 of unearned income
  • Have at least one living parent
  • Are under age 18 at year’s end or under age 24 at year’s end if a full-time student

If your child's tax rate is higher than yours, your child pays tax at the higher rate. If you'd like to learn more see the Kiddie Tax tax tip.

You can report a child's investment income on either your return or on your child's return. If your child has earned income or a sale of stock, you must file a separate return for your child. Report sales of stock on Form 1099-B.

Consider filing a separate return for your child. The disadvantages of reporting your child’s income on your return include:

  • You might have to pay more tax. Adding income to your return could:
    • Limit your IRA deduction
    • Limit your student-loan interest deduction
    • Limit your tuition and fees deduction
    • Reduce the amount of some itemized deductions
  • Your adjusted gross income (AGI) might increase, which:
    • Could affect your eligibility for certain credits, like:
      • American Opportunity Credit
      • Lifetime Learning Credit
      • Earned Income Credit (EIC)
      • Child and dependent care credit
    • Could lead you to pay the Alternative Minimum Tax (AMT) or increase the amount of AMT you owe
  • You can't claim deductions on your return that your child would be eligible for if he or she filed a separate return.

It might be better to file a separate return for your child if your child:

  • Is blind
  • Has investment expenses or other itemized deductions
  • Is affected by early withdrawal of savings

When you report your child's investment income on your return, you must file Form 8814 with your return. If the child files his or her own return and the kiddie tax applies, file Form 8615 with the child's return.

If you'd like to learn more, see Publication 929: Tax Rules for Children and Dependents at www.irs.gov.

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