Children with Investment Income - 7 Things to Know

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Children are usually in lower tax brackets than their parents. One strategy for saving money on taxes is to transfer income-producing assets to children so they pay tax on the investment income at their lower tax rates.

The IRS limits the benefit of this strategy with special rules for children who have substantial investment income.

  1. If your child has substantial investment income during the year, he or she may have to use your tax rate, or the child's other parent's tax rate, for the child's investment income.

    You don't have to worry about this rule unless your child has $2,000 or more in interest, dividend and other investment income.

  2. A “child” for this purpose is your child who was under age 18, or in some cases your child under age 24:
    • A child who has not reached age 18 at the end of the year qualifies as a child.
    • An 18-year-old is considered a child if he or she did not earn income equal to at least half of his or her own support. Wages and self-employment income are considered earned income.
    • A child over 18 but under 24 is a child for this purpose if he or she was a full–time student and did not earn income equal to at least half of his or her own support.
  3. You can generally choose to report the income on your return or your child's return.

    If your child's interest and dividend income is less than $10,000, you may choose to include that income on your return.

    Your child must file his or her own return to report his or her income if the child has $10,000 or more in investment income.

  4. If you report the income on your tax return, your child may not need to file a return.

    However, your child may still need to file his or her own tax return if he or she has other income, such as wages.

  5. If you and the child's other parent file a joint return, the child pays tax on investment income over $2,000 at the parents' rate.

    TaxAct uses information from your joint tax return to determine the correct tax rate for your child's investment income.

  6. If the child's parents file separately, with someone other than the child's other parent, or use some other filing status, use these rules to determine the correct tax rate for the child's investment income:
    • If the parents are married but filing separate returns, use the parent's return with the higher taxable income.
    • If the parents were never married, but they live with each other for the whole year, use the return of the parent with the greater taxable income.
    • If the child's parents are divorced or living apart, follow these rules:
      • If they are divorced and considered unmarried, or if they do not live with each other the whole year, use the return of the custodial parent (the parent the child lives with most of the year).
      • If the custodial parent is not considered unmarried, use the parent's return that has the higher taxable income.
      • If the child's custodial parent is divorced and has not remarried, use the custodial parent's return.
    • If the custodial parent remarries, follow these rules:
      • If one parent dies, and the widow or widower remarries, treat the stepparent as the child's other parent. If the parent and stepparent file a joint return, use that return. If they file separate returns, use the return with the higher taxable income.
      • If the divorced custodial parent has remarried, treat the stepparent as the other parent.
      • If the custodial parent remarried but is not living with his or her spouse, use the custodial parent's return, as long as the custodial parent is considered unmarried for filing purposes. If the custodial parent is considered married for the tax year, use the parent's return with higher taxable income.
  7. If a child's investment income is reported on his or her own return, TaxAct reports it on Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,000 Income.

    If you as the parent choose to report a child's income on your return, TaxAct reports that income on Form 8814, Parents' Election To Report Child's Interest and Dividends.

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Upcoming Tax Dates

January 1 — Everyone
Federal Holiday (New Year's Day) Details

January 10 — Employees who work for tips
If you received $20 or more in tips during December, report them to your employer Details

January 15 — Individuals
Make a payment of your estimated tax for 2018 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES Details

January 15 — Social security, Medicare, and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in December 2018

January 15 — Farmers & fishermen
Pay your estimated tax for 2018 using Form 1040-ES Details

January 21 — Everyone
Federal Holiday (Martin Luther King, Jr. Day) Details

January 31 — All Employers
Give your employees their copies of Form W2 for 2018. If an employee agreed to receive Form W2 electronically, have it posted on a website and notify the employee of the posting.

January 31 — Individuals who must make estimated tax payments
If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040) for 2017 by January 31. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of the last installment. If you cannot file and pay your tax by January 31, file and pay your tax by April 15.

January 31 — Payers of gambling winnings
If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W2G.

January 31 — Social Security, Medicare, and withheld income tax
File Form 941 for the fourth quarter of 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter timely, properly, and in full, you have until 02-10 to file the return.

January 31 — Certain small employers
File Form 944 to report social security and Medicare taxes and withheld income tax for 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2018 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

January 31 — Farm employers
File Form 943 to report social security and Medicare taxes and withheld income tax for 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

January 31 — Federal unemployment tax
File Form 940 for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

January 31 — All businesses
Give annual information statements to recipients of certain payments you made during 2018 Details

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