To decide whether my child's unearned income is greater than $1,050 do I add: ordinary dividends + capital distributions + realized gain? Or, do I leave realized out?
Please allow me to confirm the terms used in the question so that we are sure we are talking about the same things. Dividends are clearly unearned income--no issue there. A gain (or loss) is "realized" when the security is sold. I refer to this gain/loss as a capital gain or loss. And a capital gain is unearned income. With regard to "capital distributions", I am interpreting that to mean a distribution that is not form the corporation's earnings or profits. That distribution is normally reported as a "non-dividend distribution" on Line 3 of a 1099-DIV. That distribution is not taxable, but it reduces the basis of the security. The reduction in the basis could increase the realized income when the security is later sold. But a non-dividend distribution does not affect income until the security is sold. Therefore, because income does not exist for a non-dividend distribution, it cannot contribute to unearned income. I hope that makes sense.