Important: There are two ways you can report your child's investment income. One of them could prevent you and your family from receiving certain tax breaks. Learn more about which is better for your situation in the next section below.
Understanding the Kiddie Tax
What is the Kiddie Tax?
It's a tax, commonly referred to as the "Kiddie Tax," that is applied to your child's unearned income of more than $2,000. Unearned income refers to investments, such as interest, dividends and capital gains, income from wages or self-employment are not included.
The tax is meant to discourage parents from reducing their own taxes by shifting investments to their children, who generally have lower tax brackets. The Kiddie Tax once affected only children under age 14. That's how it got its name.
Your child is generally affected if they have investment income of more than $2,000 and falls into one of these categories:
- Under age 18 at the end of 2014,
- Age 18 at the end of 2014, with earned income (from working) that is less than or equal to half of their support for the year,
- Full-time student age 19-23 at the end of 2014, with earned income (from working) that is less than or equal to half their support.
How does the tax work?
The tax kicks in only when your child’s investment income exceeds $2,000. The first $1,000 reported on your return is tax free, the second $1,000 is taxed at the child’s rate.
Unearned income above that amount is subject to the Kiddie Tax – that is, your marginal tax rate. Marginal tax rate is your highest rate applied to the last dollar you earned. That could be as high as 28, 33, 35%, or 39.6%.
You can pay the kiddie tax in either of two ways:
- Include your child's investment income on your tax return (using Form 8814), or
- Have your child file a separate tax return (using Form 8615).
The tax on your child's income will be the same either way.
The first option, while more convenient, could increase your taxable income and prevent you from taking certain deductions and credits, such as those for education.
In the second option, your taxable income won't take a hit. But your tax rate will still be applied on the investment income reported on your child's return because your name and Social Security number will be listed on the child's return. If you file as married filing jointly, be sure to list the name and Social Security number of the parent whose name is first on the joint return.
Either way, TurboTax will guide you through the tax, whether you include your child's investment income on your return or have your child file a separate return.
For more detailed information, see What is the Kiddie Tax and Do I have To Pay It?.