Rules Affecting Investment Income for Children

In the good old days many parents put investment accounts in their children’s name to get a lower tax rate.  Not anymore!

Tax rules affect any sort of income your family may have.  Even your child’s income becomes affected by these rules. The” Kiddie” tax rule exists to regulate allocation of unearned income for children.

Children who received unearned income of more than $1,900 from interest, dividends or capital gains, may have your (the parent’s) tax rate applied to their income.  If your child meets one of the folowing three  requirements the parents tax rate will apply.

  1. Your child was under the age of 18 at the end of the year.
  2. Your child was under the age of 18 at the end of the year, and he/she’s earned income totaled less than 50% of the cost in supporting your child.
  3. Your child was a full-time student between 18 and 24 at the end of the year, and he/she’s earned income totaled less than 50% of the cost in supporting your child.

When filing your child’s investment income you have two options of where you want to allocate the money. You may file the income in your own tax returns, or under your child’s tax returns. Although these two options generally have similar results we generally feel it is better to file your child’s investment income under their own tax returns.

If you decide to go this way, and have your child file their income in their own tax returns, Form 8615, Tax for Certain Children Who Have Investment Income for More Than $1,900 must be filled out.  This form will assist in figuring the child’s tax amount using your (the parent’s) tax rate.

However, if you do decide to file your child’s taxes under your own name you must fill out Form 8814, Parents’ Election To Report Child’s Interest and Dividends.  This form includes your child’s income directly into your own tax return.

If you have any questions regarding your children’s income please contact our office.