IRS Form 8814 “The “Kiddie Tax” unearned income for children and How to Report It.
Among the suggestions used by astute tax planners is income shifting. This may include shifting some of your investment income to younger children. Beware there are special rules known as the “Kiddie Tax” imposed on children’s investment income. These rules may defeat your tax planning objectives.
Who and What Type of Income Is Subject to the “Kiddie Tax”?
For astute parents with sizeable investment income, the idea is to shift a portion of that income onto one’s child, taking advantage of the child’s lower tax bracket and thereby lowering the overall tax liability for the family as a whole. To discourage parents from this with all unearned income, the IRS imposed the “Kiddie Tax” rules.
Does This Mean This Is Not A Viable Tax Planning Option?
No, it just means that the IRS has placed a disadvantage on your income shift ability beyond certain limits. This does not mean that you cannot shift all of this type of income? It just means there is likely no tax advantage beyond the shifting of unearned income in excess of $2,100 for 2015. This amount is subject to an inflation adjustment each year.
What Happens If Your Child Has Unearned Income In Excess of the Limit?
The excess may be subject to the parents’ marginal (highest) tax rate if the parent’s tax rate is higher than that of the child. The amount under the income limit would be taxed at the child’s (typically lower) rate. Which age groups may be confronted by the “Kiddie Tax” will depend on how you choose to report your child’s income. The “Kiddie Tax” applies if the child:
Is under age 18 at the end of 2015;
- Was age 18 at the end of 2015 and did not have earned income exceeding half of the child’s support, or;
- Was a full-time student aged at least 19 but under 24, and did not have earned income exceeding half of the child’s support.
In addition to earned income being exempt from the “Kiddie Tax”, there are other reasons that a child’s income would not be subject to the “Kiddie Tax”, including:
Children who were not required to file a return because they did not have enough income to report;
Children who earned more than half of their required support. In this scenario, the child is not likely to be someone else’s dependent, and;
Anyone who files a married filing jointly tax return.
How Do You Report Your Child’s Income?
You are required to pay the “Kiddie Tax”, by attaching IRS Form 8615 if the child’s interest, dividends and other unearned income adds up to more than $2,100 for 2015 and other required criteria cited in the form are met.
Alternatively, parents may elect to include their child’s income on their own tax return using IRS Form 8814 instead if the child’s interest and dividend income (including capital gain distributions) add up to less than $10,000 and other required criteria cited in the form are met.
For more information on reporting investment income subject to the Kiddie Tax, see Topic 505.
Also See
Your Child’s Education- How Much to Finance it.
Home Office Tax Deductions for Business – Part Four of Four-Calculating the Deduction