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The Kiddie Tax

Part of a child's investment income might be subject to tax at the parent's highest marginal tax rate if:

  • The child is one of these:
    • 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 $2,000 for 2013. 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 one 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.

A child might be born on Jan. 1. The IRS treats that child as having been the same age on Dec. 31 of the previous year as he or she was on Jan. 1 of the current tax year.

Ex: Cody was born on Jan. 1, 1994, and he celebrates his 19th birthday on Jan. 1, 2013. However, he’s treated as having reached age 19 on Dec. 31, 2012, and so is age 19 for tax year 2012.

A child's unearned income is usually taxed as:

  • The first $1,000 -- equal to the dependent's standard deduction -- of the child's income isn’t taxable.
  • The next $1,000 is taxed at the child's rate.
  • Any income that’s more than $2,000 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 $1,000 and less than $10,000 after totaling only these sources:
    • Interest
    • Dividends
    • 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 his or her 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.
  • Include Form 8615. This shows the tax calculation 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 one child and Form 8615 for another.

Your child might have only a small amount of interest or dividend income to report. If so, it could 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.

If you'd like to learn more, see these tax tips:

  • Reporting a Child's Income on Your Return
  • Children and Investment Income

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