how do I differentiate long term capital gains on my child's income if I am electing to report their income?

[shanleigh]

If I elect to report my child's unearned income, how do I differentiate long-term vs short-term capital gains or is it all taxed at the same percent after the initial $1150 (not taxed), and 2nd $1150 (10%)?

[DavidD66 · Accepted solution]

You don't.  Among other requirements, in order to report your child's income, it must have been solely from interest and dividends (including capital gains distributions and Alaska Permanent Fund dividends) and be less than $11,000  If your child has long term capital gains you cannot report his/her unearned in come on your tax return.  They will have to file their own tax return and report all of their income.  For additional information on the "Kiddie Tax", click on the following link:

How do I report and pay the Kiddie Tax on my return this year?

[shanleigh]

Ok, I'm confused. What's the difference between long-term capital gains (they have short-term too ) and the "capital gains distributions" that I'm allowed to elect to report on their behalf? What are capital gains distributions then?

[PattiF]

To clarify the income of your child, what forms are reporting their income? 1099-DIV could have capital gains reported. A 1099-B would have short-term and/or long-term gains.  

@shanleigh  

[shanleigh]

The 1099-B summary was reported with $0.00 across the board (Section 1256 Contracts) in the statement, but in the Proceeds from Broker & Barter Exchange Transactions it instructs that my child (it's held with my father (Trust)) should report on Form 8949 Part I with Box A checked. Basis is provided to IRS (Line 12), referencing short & long term transactions for covered tax lots specifically (but separately).

All in all, each of my girls had stocks bought and sold in their name, resulting in  short-term gain ~$10K and long-term loss of ~$7.5K, as well as INT & DIV gains of ~$2,350 (I know where those go!).

I cannot express how much I'm appreciating y'all's input.

[PattiF]

You cannot elect to report your childrens income on your return. The exception to reporting their income on your return is If the income includes a 1099-B, sale of securities. This needs to go on a separate tax return for the each child.

Here is a TurboTax Help article with instructions for entering a 1099-B.

[Hal_Al · Accepted solution]

If your child got a 1099-B or a 1099-B summary or Proceeds from Broker & Barter Exchange Transactions to be reported on Form 8949,  you are NOT allowed to report that income on your own return. The child will have to file his own return.

The closes thing to a child's capital gain that can be reported on the parent's return is a "capital gains distribution" from a mutual fund.  You will know if you have a capital gains distribution because it is always reported in box 2a of form 1099-DIV. 

[shanleigh]

Now that y'all have me on the right track, (thank you very much, @PattiF , @DavidD66 , @Hal_Al !) filing separately for my dependent child's unearned income from the sale of stocks. We're itemizing deductions because state tax (~$4K vs $1150 standard) was so high in 2021 due to the sale of stocks. On form 8615 worksheet - can I declare the whole state tax amount as being "directly connected with the production of the child's investment income" as the sale of the stocks was the ONLY thing that generated a state tax burden?

[ShirlynW]

It depends on the State's requirement. Without knowing which state you are referring to, I am unable to give you an answer.

 Children are in a lower tax bracket than their parents and the reason for this is quite simple: most children don't have that much income, and those that do, rarely earn more than their parents.  The federal government changed the tax treatment of children's unearned income by taxing it at the parent's tax rate. Form 8615 is used to make the child's tax calculations for this income.