Due to the kiddie tax, a child’s investment income can be taxed at his or her parents’ marginal tax rate. If your child meets all the following conditions, you can report your child’s investment income on your tax return:
Your child is under age 18 at the end of the year;
Your child’s only income is from investments such as interest, dividends, or capital gain distributions;
Your child’s gross income is less than $8,500;
Your child is required to file a return;
No estimated payments were made for the child; and
No taxes were withheld from the child’s income.
When you report a child’s investment income on your return, you must file Form 8814: Parents’ Election to Report Child’s Interest and Dividends along with your return. In addition, if you’re reporting the investment income of more than 1 child on your tax return, then you must file a separate Form 8814 for each child. 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.
If any of the requirements listed above don’t apply, then you must file a separate return for your child and report your child’s investment income on Form 8615. For details, see Children and Investment Income.
You don’t have to make the same choice for all your children — you can file Form 8814 for one child and Form 8615 for another.
Although it may seem more convenient to report your child’s investment income on your return, there are some disadvantages in doing so. In fact, in some cases, reporting your child’s investment income on your return might produce a higher tax liability than filing a separate return for your child would.
These disadvantages include:
If your child’s investment income includes income from qualified dividends or capital gain distributions, the income will be taxed at the regular rate. If you file a separate return for your child, however, this income will be taxed at a special lower rate. This means that you might end up paying additional tax if you report your child's investment income on your own return.
You can’t take deductions on your return that your child would be eligible for if he or she filed a separate return, such as deductions for blindness, early withdrawal of savings, or other itemized deductions.
If your child received any tax-exempt interest from private activity bonds and you report it on your return, you might end up paying Alternative Minimum Tax (AMT) or increase the amount of AMT that you owe.
Deductions and Credits May Be Reduced
Reporting your child’s income on your return will increase your adjusted gross income (AGI), which may reduce or eliminate some deductions that you might normally be able to take. Some deductions, such as IRA contributions, student loan interest, medical expenses, casualty and theft losses, and certain miscellaneous itemized deductions, are tied to your AGI. As your income rises, the amount you can deduct is reduced.
Example: Let’s say you’re filing as head of household, your total income is $54,000, and the amount of student loan interest you paid is $2,500. As it stands now, you can deduct the full $2,500 and reduce your AGI by this amount. Suppose your child has interest income of $3,000 and you decide to report this interest on your return. By adding the $3,000 to your return, your total income will increase by $1,300 (this is the $3,000 less the $1,700 taxed separately on Form 8814) to $55,300, which will reduce the amount of student loan interest that you can deduct to $2,450.
The increase in AGI might also reduce the credits that you can take, such as the Child and Dependent Care Credit, child tax credit, Earned Income Credit, and education credits.
Example: Suppose that you and your spouse are filing a joint return, you have 2 children, your wages total $28,000, and you have dividends and interest totaling $2,000, which means that you qualify for the Earned Income Credit. And, let’s assume that 1 of your children has interest income of $3,000. If you add the child’s interest income of $3,000 to your return, you won’t qualify for the Earned Income Credit because the amount of investment income reported on the return will exceed the amount allowed. As a result, you’ll lose more than $2,000 in Earned Income Credit.
And, finally, the increase in tax could increase the balance due on your return, which might trigger a penalty for underpayment of estimated tax.
For more information, see Publication 929: Tax Rules for Children and Dependents.