When a child has unearned income from investments in his or her own name, taxes can be a bit tricky. Depending on how much the unearned income is, part of it may be taxed at the child’s parent’s tax rate, for example.
Recently the IRS published their Tax Tip 2016-52, which details What You Should Know about Children with Investment Income. The text of the Tip is below:
What You Should Know about Children with Investment Income
Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five important points to keep in mind if your child has investment income:
- Investment Income. Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.
- Parent’s Tax Rate. If your child’s total investment income is more than $2,100 then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.
- Parent’s Return. You may be able to include your child’s investment income on your tax return if it was less than $10,500 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more.
- Child’s Return. If your child’s investment income was $10,500 or more in 2015 then the child must file their own return. File Form 8615 with the child’s federal tax return.
- Net Investment Income Tax. Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax.
Refer to IRS Publication 929, Tax Rules for Children and Dependents. You can get related forms and publications on IRS.gov.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Sterling Raskie, MSFS, CFP®, ChFC®
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