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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