Child with K-1

Today TaxMama® hears from Michele in the TaxQuips Forum, with this question.  “My client files MFJ with a son. The son made $1,237 on a W-2 and he received a K-1 with $137 in box one (business income) and $1,832 in the self-employment box. Does a K-1 qualify as investment income? Will the parents be able to claim him as a dependent?”

 

Dear Michele,

Good questions. Gets confusing, doesn’t it?

Of course they can take their young child as a dependent.

BUT…the child needs to file his/her own tax return. The child will not claim his/her exemption. The child will report the income on that return. Normally, you would use Form 8615 to report any investment income. It would be taxed at the parents’ highest tax rate – so you need the parents’ data to prepare the child’s return.

However, this is business income and SE income. So… When it comes to a child?
Anything that isn’t wages or self-employment income is investment income.  (That includes scholarships, Social Security and other ridiculous sources of income – ALL investment income. It was a shocking discovery a couple of years ago.)

Incidentally, how old is the child? And did s/he have anything to do with the operation of the business? I would say that if this is a minor child, not working in the business, then there should be no self-employment income at all. So, you may want to investigate that aspect of the K-1.  I hope this makes some sense?

And remember, you can find answers to all kinds of questions about children’s income and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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