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How is a child's investment income taxed?

 

Part or all of a child's investment income may be taxed at the parent's rate rather than the child's rate. Because a parent's taxable income is usually higher than a child's income, the parent's top tax rate will often be higher as well.

 

This special method of figuring the federal income tax applies to children who are under the age of 18, as well as:

 

  • A child who is age 18 at the end of the year and whose earned income is not more than half of the child's support, and
  • A student who is under age 24 at the end of the year and whose earned income is not more than half of the child's support.

 

For 2008, it applies if the child's total investment income for the year was more than $1,800. Investment income includes interest, dividends, capital gains, and other unearned income.

 

To figure the child's tax using this method, fill out Form 8615, "Tax for Children Under Age 18 With Investment Income of More Than $1,800", and attach it to the child's federal income tax return.

 

Alternatively, a parent can, in many cases, choose to report the child's investment income on the parent's own tax return. Generally speaking, this option is available if the child's income consists entirely of interest and dividends (including capital gain distributions) and the amount received is less than $8,500. However, choosing this option may reduce certain credits or deductions that parents may claim.

 

In addition, wages and other earned income received by a child of any age are taxed at the child's normal rate.

 

More information can be found in IRS Publication 929, "Tax Rules for Children and Dependents". This publication and Form 8615 are available on the IRS Web site at IRS.gov in the Forms and Publications section. You may also order them by calling the IRS at 800-TAX-FORM (800-829-3676).

 

Remember that for the genuine IRS Web site be sure to use .gov. Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.


 

Links:
 

  • Form 8615, "Tax for Children Under Age 18 With Investment Income of More Than $1,800" (PDF 49K)
  • Form 8615, "Instructions for Form 8615" (PDF 24K)
  • Form 8814, "Parent's Election to Report Child's Interest and Dividends" (PDF 43K)
  • Publication 929, "Tax Rules for Children and Dependents" (PDF 220K)

 

 

Source: IRS TAX TIP 2008-38

 


Reviewed by Brenda Procter, M.S., State Specialist & Instructor, Personal Financial Planning, University of Missouri Extension

 

 

 

 

 

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Last update: Monday, November 17, 2008

 

 

 


 
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