Chapter 32
Tax on unearned income of certain children
Reminder
This chapter discusses the following two rules that may affect the tax on unearned income of certain children.
- If the child’s interest and dividend income (including capital gain distributions) total less than $10,500, the child’s parent may be able to choose to include that income on the parent’s return rather than file a return for the child. (See Parent’s Election To Report Child’s Interest and Dividends, later.)
- If the child’s interest, dividends, and other unearned income total more than $2,100, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate. (See Tax for Certain Children Who Have Unearned Income, later.)
For these rules, the term “child” includes a legally adopted child and a stepchild. These rules apply whether or not the child is a dependent. These rules do not apply if neither of the child’s parents were living at the end of the year.
Useful Items
You may want to see:
Publication
929 Tax Rules for Children and Dependents
Form (and Instructions)
- 8615 Tax for Certain Children Who Have Unearned Income
- 8814 Parent’s Election To Report Child’s Interest and Dividends
Which Parent’s Return to Use
If a child’s parents are married to each other and file a joint return, use the joint return to figure the tax on the child’s unearned income. The tax rate and other return information from that return are used to figure the child’s tax, as explained later under Tax for Certain Children Who Have Unearned Income.
Parents Who Do Not File a Joint Return
For parents who do not file a joint return, the following discussions explain which parent’s tax return must be used to figure the tax.
Only the parent whose tax return is used can make the election described under Parent’s Election To Report Child’s Interest and Dividends.
Parents are married. If the child’s parents file separate returns, use the return of the parent with the greater taxable income.
Parents not living together. If the child’s parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income.
For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2.
Parents are divorced. If the child’s parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent.
Custodial parent remarried. If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child’s other parent. Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Do not use the return of the noncustodial parent.
If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies.
Parents never married. If a child’s parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. If the parents did not live together all year, the rules explained earlier under Parents are divorced apply.
Widowed parent remarried. If a widow or widower remarries, the new spouse is treated as the child’s other parent. The rules explained earlier under Custodial parent remarried apply.
Parent’s Election To Report Child’s Interest and Dividends
You may be able to elect to include your child’s interest and dividend income (including capital gain distributions) on your tax return. If you do, your child will not have to file a return.
You can make this election only if all the following conditions are met.
- 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 $10,500.
- 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 return) 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 the special tax rules for children. (See Which Parent’s Return To Use, earlier.)
These conditions are also shown in Figure 32.A.
Figure 32.A Can You Include Your Child’s Income On Your Tax Return?
Certain January 1 birthdays. A child born on January 1, 1999, is considered to be age 19 at the end of 2017. You cannot make this election for such a child unless the child was a full-time student.
A child born on January 1, 1994, is considered to be age 24 at the end of 2017. You cannot make this election for such a child.
Full-time student. A full-time student is a child who during some part of each of any 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.
How To Make the Election
Make the election by attaching Form 8814 to your Form 1040. (If you make this election, you cannot file Form 1040A or Form 1040EZ.) Attach a separate Form 8814 for each child for whom you make the election. You can make the election for one or more children and not for others.
Effect of Making the Election
The federal income tax on your child’s income may be more if you make the Form 8814 election.
Rate may be higher. If your child received qualified dividends or capital gain distributions, you may pay up to $105 more tax if you make this election instead of filing a separate tax return for the child. This is because the tax rate on the child’s income between $1,050 and $2,100 is 10% if you make this election. However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent), because of the preferential tax rates for qualified dividends and capital gain distributions.
Deductions you cannot take. By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return.
- The additional standard deduction if the child is blind.
- The deduction for a penalty on an early withdrawal of your child’s savings.
- Itemized deductions (such as your child’s investment expenses or charitable contributions).
Reduced deductions or credits. If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following.
- Deduction for contributions to a traditional individual retirement arrangement (IRA).
- Deduction for student loan interest.
- Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses.
- Credit for child and dependent care expenses.
- Child tax credit.
- Education tax credits.
- Earned income credit.
Penalty for underpayment of estimated tax. If you make this election for 2017 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. If you plan to make this election for 2018, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. See chapter 4 for more information.
Tax for Certain Children Who Have Unearned Income
If a child’s interest, dividends, and other unearned income total more than $2,100, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate. If the parent does not or cannot choose to include the child’s income on the parent’s return, use Form 8615 to figure the child’s tax. Attach the completed form to the child’s Form 1040 or Form 1040A.
When Form 8615 must be filed. Form 8615 must be filed for a child if all of the following statements are true.
- The child’s investment income was more than $2,100.
- The child is required to file a return for 2017.
- The child either:
- Was under age 18 at the end of the year,
- Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or
- Was a full-time student, at least age 19 and under age 24 at the end of 2017, and did not have earned income that was more than half of the child’s support.
- At least one of the child’s parents was alive at the end of 2017.
- The child does not file a joint return for 2017.
These conditions are also shown in Figure 32.B.
Figure 32.B Do You Have To Use Form 8615 To Figure Your Child’s Tax?
Earned income. Earned income includes salaries, wages, tips, and other payments received for personal services performed. It does not include unearned income as defined later in this chapter.
Unearned income defined. Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, taxable scholarship and fellowship grants not reported on Form W-2, the taxable part of social security and pension payments, and certain distributions from trusts. Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).
Nontaxable income. For this purpose, unearned income includes only amounts the child must include in total income. Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included.
Income from property received as a gift. A child’s unearned income includes all income produced by property belonging to the child. This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it.
A child’s unearned income includes income produced by property given as a gift to the child. This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act.
Example. Amanda Black, age 13, received the following income.
- Dividends—$1,000
- Wages—$2,100
- Taxable interest—$1,200
- Tax-exempt interest—$100
- Capital gains—$300
- Capital losses—($200)
The dividends were qualified dividends on stock given to her by her grandparents.
Amanda’s unearned income is $2,300. This is the total of the dividends ($1,000), taxable interest ($1,200), and capital gains reduced by capital losses ($300 – $200 = $100). Her wages are earned (not unearned) income because they are received for work actually done. Her tax-exempt interest isn’t included because it is nontaxable.
Trust income. If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child.
However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income.
Support. Your child’s support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your child’s support, count support provided by you, your child, and others. However, a scholarship received by your child is not considered support if your child is a full-time student. See chapter 3 for details about support.
Certain January 1 birthdays. Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed.
| IF a child was born on . . . | THEN, at the end of 2017, the child is considered to be . . . |
| January 1, 2000 | 181 |
| January 1, 1999 | 192 |
| January 1, 1994 | 243 |
1 This child is not under age 18. The child meets condition 3 only if the child did not have earned income that was more than half of the child’s support.
2 This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child’s support.
3 Do not use Form 8615 for this child.
Alternative minimum tax. A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. See Alternative Minimum Tax (AMT) in chapter 31.
For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. For information on special limits that apply to a child who files Form 6251, see Certain Children Under Age 24 in the Instructions for Form 6251.
Net Investment Income Tax. A child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of the net investment income or the excess of the child’s modified adjusted gross income (MAGI) over the threshold amount. Use Form 8960, Net Investment Income Tax, to figure this tax. For more information on NIIT, go to www.irs.gov and enter “Net Investment Income Tax” in the search box.