No, your children would not have to file the Michigan state tax return, even though they would have had to file a federal tax return if you had not reported the interest income on the 8814. Michigan uses the federal AGI as the starting point, so since the 8814 income is included on your tax return, it will be subtracted out on your Michigan return on the Schedule 1. (The income is accounted for on your return.) This would be in contrast to a situation where they would be required to file their own federal return because of earned income.
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