Hello, My child has a UTMA account and received $1200 in dividends and capital gains. Should I file a separate tax return for her ? Or include it on my return?

[vze42y72]

Just trying to understand pros and cons. Don't want to pay extra on turbotax to create a separate account and file for my child.

[rjs]

There are many possible disadvantages of including your child's income on your tax return. It can cause you to pay more tax overall than if you file a separate return for the child. The only advantage of reporting the income on the parent's return is that it's less paperwork. IRS Publication 929 has a long list of reasons that reporting the income on the parent's return could result in paying more tax. See "Effect of Making the Election" on pages 11 - 12.

What kind of capital gains does she have? Does she have gains from investment sales reported on Form 1099-B, or does she only have capital gain distributions on Form 1099-DIV box 2a. If she has sales on a 1099-B you cannot include her income on your tax return.

If her only income is dividends and capital gain distributions, you should be able to use TurboTax Free Edition for her return. Otherwise you could use IRS Free File.

[Mike9241]

if the only income the child had was from capital gain distributions and dividends you could report your child's income on your return - form 8814 - see eligibility requirements below.   since the unearned income is less than $2200 and you get an $1100 exemption you would pay a tax of $10 on the $100 that's taxable ($1200 received less $1100 exemption).  

for $10 you save yourself the trouble of preparing a separate return for her. on a separate return based on $1200 of unearned income te tax would be $11 but if $1199 the tax would be $9

be warned if you have a state income tax she may require you to file.  to e-file it, would require you to prepare and file a federal return for her  

Parents' Election To Report
Child's Interest and Dividends
(Form 8814)
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 won't 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 $11,000.
• The child is required to file a return unless you make
this election.
• The child doesn’t 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 SSN.
• No federal income tax was withheld from 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

[titi10402022]

Can you provide clarification on the circumstances under which incorporating a child's income into the parents' return would result in higher taxes compared to filing the child's return separately? Is it a consistent rule that such inclusion always leads to higher or at least equal tax liability?

Thanks!

[rjs]

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@titi10402022 wrote:

Can you provide clarification on the circumstances under which incorporating a child's income into the parents' return would result in higher taxes compared to filing the child's return separately?

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@titi10402022 

First of all, you refer to "incorporating a child's income." But you can only include a few specific types of a child's income on the parents' return. As stated in the second bullet in Mike9241's post above, you can only do it if the child's only income is interest, dividends, capital gain distributions, and Alaska Permanent Fund dividends. If the child has any other type of income, you have to file a separate return for the child, if he or she is required to file.

Many of the circumstances that would result in higher tax are listed in the IRS Instructions for Form 8814, which is the form that's used to report a child's interest and dividends on the parents' return. In the instructions, in the left column on page 2 see "Tax benefits you cannot take," "Reduced deductions or credits," and "Rate may be higher." Including a child's interest and dividends could also make you subject to Net Investment Income Tax or increase your Net Investment Income Tax if you are already subject to it.

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@titi10402022 wrote:

Is it a consistent rule that such inclusion always leads to higher or at least equal tax liability?

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That's almost always true, but it's not quite 100%. There are a couple of rare circumstances where the parents might benefit from including the child's interest and dividends. These involve the deduction for investment interest or very large contributions to charity. But these rare possible benefits will not necessarily outweigh the disadvantages.