Should You File an Income Tax Return for your Child?

If your child has investment income, you may be able to elect to include the income on your income tax return instead of filing a separate income tax return for that child. The federal income tax on your child's income may be at a higher rate if you make this election. Also, there may be certain deductions that are limited or you cannot take.

In regards to reporting a child's investment income on your tax return, a child includes a legally adopted children and stepchildren, and the rules apply whether or not the child is a dependent.

The two primary rules that may affect the federal income tax on the investment income of certain children are described below:
1. If your child's interest and dividend income (including capital gains distributions) total less than $9,500, you may be able to choose to include that income on your income tax return rather than file an income tax return for your child.
2. If your child's interest, dividends, and other investment income total more than $1,900, part of that income may be taxed at your tax rate instead of the child's tax rate.

Parent' Election to Report Child's Interest and Dividends.If all the following conditions are met, you may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your income tax return:
- Your child was under age 19 (or under age 24 if a full-time student) at the end of the year
- Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends)
- The child's gross income was less than $9,500
- The child is required to file a return unless you make this election
- The child does not file a joint return for the year
- No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended returns) was applied to this year under your child's name and social security number
- No federal income tax was taken out of your child's income under the backup withholding rules
- You are the parent whose return must be used when applying special tax rules for children

Rate May Be Higher. If you elect to include your child's investment income on your return, your tax liability may be $95 higher than if you chose to file a separate return for your child. This increase is due to the fact that the tax rate on your child's income between $950 and $1,900 is 10%, while if you file a separate return the tax rate may be as low as 0% because of the preferential tax rates for qualified dividends and capital gain distributions.

Deductions You Cannot Take. By making this election to include your child's income, there are deductions that you cannot take that the child would be entitled to on his or her own return. These deductions include: the deduction for an early withdrawal penalty on any of your child's savings, the additional standard deduction if the child is blind; and; itemized deductions, such as your child's investment expenses or charitable contributions.

Reduced Deductions or Credits. If you make the election to include your child's income, your increased adjusted gross income may reduce certain deductions or credits on your return, including:
- Deductions for contributions to a traditional IRA
- Deduction for student loan interest
- Certain itemized deductions
- Credit for child and dependent care expenses
- Child tax credit
- Education tax credits

Penalty for Underpayment of Estimated Tax.If you make this election, but did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty for the underpayment of tax. You may need to increase your federal income tax withholding or your estimated payments to avoid this underpayment penaltyIf you plan to make this election.

Figuring Child's Income and Additional Tax.To figure your child's interest and dividend income and the related tax, use Form 8814, Parent's Election to Report Child's Interest and Dividends.

Tax for Certain Children Who Have Investment Income of More Than $1,900. If your child's interest, dividends, and other investment income total more than $1,900, part of that income may be taxed at your rate if you elect to include their income on your return.

Tax preparers and tax preparation firms can provide you with more information regarding your income tax return. For example, StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning.

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Please be advised that in order to ensure StrataTax's compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.