Tax Rates for a Child’s Investment Income

Courtesy of the Internal Revenue Service TT-2008-38

Part or all of a child’s investment income may be taxed at the parent’s rate rather than the child’s rate. Because a parent’s taxable income is usually higher than a child’s income, the parent’s top tax rate will often be higher as well.

This special method of figuring the federal income tax only applies to children who are under the age of 18. For 2007, it applies if the child’s total investment income for the year was more than $1,700. Investment income includes interest, dividends, capital gains, and other unearned income.

To figure the child’s tax using this method, fill out Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700, and attach it to the child’s federal income tax return.

Alternatively, a parent can, in many cases, choose to report the child’s investment income on the parent’s own tax return. Generally speaking, this option is available if the child’s income consists entirely of interest and dividends (including capital gain distributions) and the amount received is less than $8,500. However, choosing this option may reduce certain credits or deductions that parents may claim.

For 2007, these special tax rules do not apply to investment income received by children who are age 18 and over. In addition, wages and other earned income received by a child of any age are taxed at the child’s normal rate.

More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. This publication and Form 8615 are available on the IRS Web site at IRS.gov in the Forms and Publications section. And in TaxMama’s Resource
Box below. You may also order them by calling the IRS at 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

[TaxMama Note: When your child has substantial investment income, like interest or dividends, have them file their own tax return. Removing that income from your return may allow you to qualify for the Earned Income Credit and other credits and tax benefits based on lower income levels. ]
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  • Form 8615 :: Tax for Children Under Age 18 With Investment Income of More Than $1,700

  • Form 8615 :: Instructions to above form

  • Form 8814 :: Parents’ Election To Report Child’s Interest and Dividends
  • Publication 929 :: Tax Rules for Children and Dependents

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