| Tax Rates for a Child's Investment Income | Part or all of a child's investment income may be taxed at the parent's rate rather than the child's rate. Because a parent's taxable income is usually higher than a child's income, the parent's top tax rate will often be higher as well. This special method of figuring the federal income tax, “kiddie tax” only applies to children who are under the age of 18. For 2007, it applies if the child's total investment income for the year was more than $1,700. Investment income includes interest, dividends, capital gains, and other unearned income. |
Kiddie Tax Facts: It only affects children through age 17 in 2007 and then starting in 2008, through age 18 or 23 for full-time students. It only applies to unearned income, which is typically investment income held in the child’s name. Income from other sources, such as employment, is not affected by the Kiddie tax. For 2007, only unearned income over the annual earnings limit of $1,700 is taxed under the Kiddie Tax rules. Kiddie Tax does not apply to married couples filing a joint return. Kiddie Tax does not apply if the earned income of a student over age 17 exceeds half of the child’s living expenses. Living expenses include food, housing, clothing, medical, dental, education and other necessary costs of support. Students over 17 are considered independent from their parents if they provide more than 50% of their own support.
To figure the child's tax using this method, fill out Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700, and attach it to the child's federal income tax return. Alternatively, a parent can, in many cases, choose to report the child's investment income on the parent's own tax return. Generally speaking, this option is available if the child's income consists entirely of interest and dividends (including capital gain distributions) and the amount received is less than $8,500. However, choosing this option may reduce certain credits or deductions that parents may claim. These special tax rules do not apply to investment income received by children who are age 18 and over. In addition, wages and other earned income received by a child of any age are taxed at the child's normal rate. Call us for more information or see IRS Publication 929, Tax Rules for Children and Dependents. Note: Congress has once again tightened the age requirements on the Kiddie Tax for tax year 2008. In May 2007, Congress amended the Kiddie tax rules again as part of the Iraq spending bill. The Kiddie Tax age limit will increase in 2008 to affect children’s investment income through age 18 and full-time students through age 23. The Kiddie Tax rules in 2007 affect children’s investment income through age 17.
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