Children earning investment income are required to pay tax on these earnings. If these earnings exceed a certain amount, children may be required to pay at a higher than usual tax rate.
This page:
• Briefly explains the kiddie tax
• Describes children who qualify for the kiddie tax
• Lists the proper forms to complete and file
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Simply put, the kiddie tax is a higher tax that children with substantial investment income must pay.
More technically, children under the age of 14 with at least one living parent and more than $1,600 in investment income are required to pay tax at their parent's higher tax rate instead of their own lower tax rate.
This is called the "kiddie tax".
Filing for the kiddie tax
The calculation of your child's kiddie tax works as follows:
• the first $800 of the child's income is not taxed at all, • the next $800 is taxed at the child's lower tax rate and • the remainder is taxed at the parent's tax rate.
The kiddie tax is computed either by using Form 8615 or Form 8814. Form 8615 is used if your child files a separate tax return from you. Form 8814 is used if you decide to report your child's income on your own return. (You can download all federal tax forms.)
Your tax return needs to be finished before you start your child's tax return. Also, if applicable, separate forms for each qualifying child must be completed not just one.
Since there are no stipulations for using either form, you should use the one that benefits you the most. In some situations it makes more tax sense to use one form, in other situations another, and sometimes it makes no difference at all.
As a general rule, if your child's income exceeds $1,500 you should use Form 8615 and complete a separate tax return for that child.
The reasoning is: claiming your child's investment income as your own may result in placing you in a higher tax bracket, essentially forcing you to pay a higher tax on a larger amount of money. If this is the case, the hassle of completing a return for your child is worth the tax savings.
Another disadvantage of using Form 8814, is certain deductions available to the child on a separate return are not deductible on the parent's return simply because From 8814 is being used.
If you are not affected by either of these drawbacks, you can decide either way.
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An additional tip
If a child is accumulating bond interest on a series EE or I bond, it may make sense for them to claim the interest annually by filing a tax return each year.
If bond interest is your child's only income, it will likely be too little to prompt any tax liability.
What this means is your child can escape paying taxes on income generated by these bonds, by claiming them each year.
The best part is that once you file your child's initial tax return and elect to claim the earned bond interest each year, you no longer have to file a yearly tax return - as long as the interest income remains below the filing requirement amount of $800.
When the bonds are cashed the interest claimed in the previous years will not be included in the taxable income - therefore escaping taxation.
Related IRS publications
You can get more information about your child's taxes directly from the IRS, in the form of Publication 929.
If you are filing a paper return, you will also need to include Schedule C with your 1040 form. (If you file online, this will be taken care of for you electronically.)
Note: you will need an Adobe Acrobat Reader to view these publications, which you can get here. (But you probably already have it.)
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