The “kiddie tax,” as it has become known, is a special set of rules regarding the taxation of investment income of children under age 18. Investment income, for purposes of the kiddie tax rules, means all taxable income other than earned income. It includes interest, rents, capital gains, dividends, royalties, annuities, and income received as the beneficiary of a trust.
Generally, a child’s investment income is taxed as follows:
The first $850 (equal to the dependent’s standard deduction) is not taxable.
The next $850 is taxed at the child’s rate.
Any income in excess of $1,700 is taxed at the parent’s rate.
For 2007, part of a child’s income can be subject to tax at the parent’s marginal tax rate if all the following are true:
The child is under age 18 on January 1, 2008;
The child has more than $1,700 of taxable and tax-exempt investment income for the tax year;
The child is required to file a tax return for 2007; and
At least 1 parent of the child was alive on December 31, 2007.
You can report a child’s investment income on either your tax return, if certain conditions apply, or your child’s tax return. When you report a child’s investment income on your return, you must file Form 8814 along with your return. Our Interview topic, Child’s Income on Your Return (Form 8814), will help you do this. Just click Take Me To and go to Income. Scroll to Child’s Income on Your Return (Form 8814) and click Go To.
When you report your child’s investment income on a separate return, you use Form 8615 to do so. Our Child with Investments Interview topic will walk you through it. Click Take Me To and go to Taxes, Penalties, and Payments. Scroll to Child with Investments (Form 8615) under Taxes, Penalties, and Payments, and click Go To.
If your child has earned income or income from the sale of stock (reported on Form 1099-B), you must file a separate return for your child and use Form 8615 to report the investment income. You don’t have to make the same choice for all your children, though — you can file Form 8814 for 1 child and Form 8615 for another.
If your child has only a small amount of interest and / or dividend income to report, the convenience of reporting your child’s income on your return might make sense for you. You might be missing out on some deductions that could reduce your taxes, though. In most cases, filing a separate return for your child is probably your best bet. For details about each option, see Reporting Your Child’s Income on Your Return and Children and Investment Income.