How to Handle Child Income on a Tax Return

In previous years, affluent families in higher tax brackets frequently funneled money through their children, taking advantage of their childrens' lower taxes on investment income. Prior to 2006, the first $850 of unearned income for a child under the age of 14 was tax-free. Every dollar above that figure was taxed at 15 percent. That created a powerful incentive for parents to avoid federal taxes by declaring large sums in their child's name. Recent changes by Congress raised the limit to include dependents under 19 and dependent full-time students under 24. The first $850 is still free of federal income tax, and the next $850 is taxed at the child's rate. Everything above that figure, however, is taxed at the parent's tax rate. This tax applies only to unearned income. Earned income is taxed on the child's tax return.

Instructions

    • 1

      Download IRS Form 8814 (see Resources). This form is for parents who elect to declare their child's income on his own tax return.

    • 2

      Fill out Form 8814 according to the IRS Instructions and return it with your individual tax return. Find the instructions starting on page 2 of the form. If you claim the income, your child will not have to file a return. If you elect not to claim the income on your return, you must declare it on your child's return, provided your child meets the income thresholds. You may claim the income on your return only if your child is under 19 (under 24 if a full-time student), the child's only income was from interest and dividends, gross income was less than $9,500, the child does not file a joint return and no federal income tax was withheld from your child.

    • 3

      Prepare a tax return for the child. You must file a tax return in your child's name if unearned income during the year was more than $950, earned income was $5,700 or greater, or gross income was more than the larger of $950 or your earned income (up to $5,400), plus $300. Additionally, your child must file a return if your child had self-employment income of $400 or more.

      Assuming your child has no dependents and does not itemize deductions, you may be able to use IRS Form 1040EZ. Otherwise, use IRS Form 1040.

    • 4

      Return your child's tax return to the IRS, along with the completed Form 8814, if applicable.

Tips & Warnings

  • If you claim your child's income on your own return, you cannot take an additional standard deduction of $1,400 if your child is blind, nor may you deduct penalties paid for early withdrawals of your child's savings. You also may not itemize your child's charitable contributions or investment expenses.
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