Some children who receive investment income are required to file a tax return and pay
tax on at least a portion of that income (and possibly at the parents' marginal tax
rate). This is often referred to as the kiddie tax. The kiddie tax cannot be computed
accurately until the parents' income is known. Thus, the child's return may have to
be extended until the parents' return has been completed. Additionally, if the
parents' return is amended or adjusted upon IRS audit, the child's return could
require correction (assuming the changes to the parental return affect the tax
bracket). If a child cannot file his or her own tax return for any reason, such as
age, the child's parent or guardian is responsible for filing a return on the child's
There are tax rules that affect how parents report a child's investment income.
Investment income normally includes interest, dividends, capital gains, and other
unearned income, such as from a trust. Some parents can include their child's
investment income on their tax return. Other children may have to file their own tax
return. Special rules apply if a child's total investment income is more than $2,000.
Finally, the parents' tax rate may apply to part of that income instead of the
child's tax rate.
Note: Higher income individuals subject to the 3.8% net investment
income tax (3.8% NIIT) may benefit from shifting income to and having their child
claim investment income on the child's tax return. This may be advantageous because
the child receives his or her own $200,000 exclusion from the 3.8% NIIT.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014