Should I Include My Child's Investment Income on My Tax Return?

If you have a minor child under age 14 who has investment income, such as interest, dividends, or capital gains on investments that are in an account in the child’s name, you may be able  to include that income on your income tax return, instead of filing a separate return for the child. But it may not necessarily be to your advantage to do so. You may avoid having to file another tax return, but you may end up paying more tax. And, if the child’s total investment income is over a threshold amount, the “kiddie tax” applies, and part of the child’s income will be taxed at the parent’s rate. 

General Rules

There are two rules that apply to the investment income of a minor child: 

1. If the child’s total investment income is less than $8,000 (effective for tax year 2005), the income can be included on the parent’s return rather than filing a separate return for the child. The child’s income must be only from dividends, interest, capital gain distributions (such as from a mutual fund), and Alaska Permanent Fund dividends. If the child has capital gains or losses from the sale of stock, the parent cannot include the income and a separate return must be filed for the child’s income. If the child’s investment income is more than $8,000, a separate return has to be filed for the child, regardless of age. And, if any tax was withheld on the child’s income, or if estimated tax payments were made during the year on that income, a separate return would have to be filed for the child and the parents could not include the income on their return. 

2. If the child’s investment income is more than $1,600, part of it may be subject to tax at the parent’s rate. The $1,600 is the threshold amount for having to pay tax at the parent’s rate, and is two times the amount allowed as a standard deduction for a dependent who has only investment income to report ($800 for 2005).

Published by Kevin Hagen Born in Minnesota, USA in 1955; studied Business Administration - Accounting, graduating in 1977 and obtaining CPA license. Worked in corporate accounting environments, eventually becoming a technical trans...  View profile

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