“Kiddie Tax” Laws: Not Just For Kids

If you, or a generous relative, has set up a trust or other interest-bearing account for your minor child, you may be facing some unique problems related to unearned income when tax time comes around. How do you report your child’s interest income? Should you file a return on behalf of your minor child, or do you report the interest as your own income and save yourself the trouble of filing two returns?

The answer is, both options are possible. Many parents forgo filing the complicated 8615 Form, “Tax for Children Under Age 18 With Investment Income of More Than $1,800,” in favor of electing to report the interest as part of their own return (which requires Form 8814, “Parents’ Election to Report Child’s Interest and Dividends.” A parent can do this if all of the following requirements are fulfilled:

  • The child’s income is entirely made up of interest and dividends (no earned income).
  • The child’s income is not greater than $8,500 for 2008.
  • There are no estimated tax payments that have yet been made on behalf of the child.
  • The child’s income is not subject to backup withholding.

While electing to report your child’s income on your own tax return can save time in filing, you should be aware that in some cases, it might increase your tax liability as a parent. For instance, you will not be able to claim any additional deductions against the child’s income such as itemized deductions, charitable contributions, or higher standard deductions for disability (for instance, if the child was blind). It might also result in a reduction in the parents’ ability to deduct other expenses such as IRA contributions and medical expenses. All income in excess of $1,800 will be added to the parents otherwise taxable income, raising the overall income reported on tax return. In that case, the unearned income of your child under the age of 10 might push you into a bracket in which it would be taxed at rates as high as 35 percent. In other circumstances, the parent’s top marginal rate might otherwise be much lower, based on their actual income.

However, if the parents are already in the 35 percent tax bracket, they may be able to achieve significant savings through the election and be able to deduct investment interest as their own. Talk to your tax professional and see what he or she recommends regarding your child’s unearned income.