Posts Tagged ‘Child’s Investment Income’

Is Your Child Receiving (Passive) Investment Income?

Friday, March 16th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

 Tax Rules May Affect Your Child’s Investment Income

 

Parents may not realize that there are tax rules that may affect their child’s investment income. The IRS offers the following four facts to 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 meets one of three age requirements for 2011:

  • Was under age 18 at the end of the year,
  • Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or
  • Was a full-time student over age 18 and under age 24 at the end of the year and did not have earned income that was more than half of his or her support.

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.

More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. This publication and Forms 8615 and 8814 are available on this website or by calling 800-TAX-FORM (800-829-3676).

Links:

  • Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900 and instructions
  • Form 8814, Parent’s Election to Report Child’s Interest and Dividends 
  • Publication 929, Tax Rules for Children and Dependents

Is Your Child’s Investment Income Taxable at Your Tax Rate?

Tuesday, March 15th, 2011

For several decades parents have endeavored to reduce the taxes on their own investment income by transferring some of their investments to their children with a goal of having the child pay the income taxes, but at the lower child’s rate.  Investment income includes, but is not limited to, interest, dividends, capital gains, annuities etc.  This tax avoidance strategy may work in some situations.  However, if the total investment income is more than $1900.00/year, the excess will still be taxed at the higher parental tax rate.  This situation could also occur if the child meets any one of the three age criteria (see below).

You should read IRS Publication 929, “Tax Rules for Children and Dependents”.  You may have to include Form 8615 (“Tax For Children Who Have Investment Income of More Than $1.900.00”) with the child’s tax return to have the income taxed at the parent’s rate.  Form 8814 (“Parent’s Election to Report Child’s Interest and Dividends”) will avoid having the child file a return but the interest, dividends etc will be reported and taxed at the parent’s rate. (more…)