“Kiddie Tax” Nuisance

Recall that some dependent children must file a Form 8615 with their tax return, and subject unearned (generally, investment) income to income taxation at his parents’ tax rate.  The form must be filed for any child who meets all of the following conditions:

  • The child had more than $2,000 of unearned income.
  • The child is required to file a tax return.
  • The child either was under age 18 at the end of the tax year, or was age 18 at the end of the year and did not have earned income that provided more than half of his support, or was a full-time student at least age 19 and under age 24 at year end and did not have earned income that provided more than half of his support.
  • At least one of the child’s parents was alive at the end of the year.
  • The child does not file a joint return.

The law does also allow the parents to elect to include the child’s investment income on

their own tax return instead of the child filing per the above rules on his own.  Under that scenario, the parents include a Form 8814 with their return, which may or may not be a good idea in consideration of the family’s tax obligations as a whole.  Some advantages of the Form 8814 route:

  • This approach might save time (and money in the form of tax return preparation costs), especially when there is more than one child involved.
  • For parents who otherwise might not be able to deduct all of their investment interest expense (because of a dearth of investment income) this approach might help them out by enabling them to increase their reported investment income.
  • Also, higher investment income for the parents means their adjusted gross income will be higher, thus allowing them more charitable contribution deductions if they would otherwise bump into that limitation.  (But this condition cuts more than one way – higher AGI could limit parents’ ability to deduct medical expenses, casualty losses, and miscellaneous itemized deduction, not to mention IRA contributions in some cases.)
  • And of course, inclusion by parents of child’s investment income might subject that income to the onerous Obama 3.8% net investment income tax, due to parents’ higher AGI.

Bottom line:  push a pencil before selecting the best reporting scheme for your family

situation.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

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