Taxpayers are required to pay tax on any income received from investments. The same applies to children with investment income. If a child is unable to file their own return, the responsibility lies with the parent or legal guardian to ensure a tax return has been filed correctly.
Depending on the type of investment income, certain children may have special requirements that may alter the tax rate or the way the income should be reported when filing. If your child has investment income to report, you should be aware of the following conditions:
Special Rules: If your child’s investment income is $2,000 or more, it may be subject to special rules. You may have to apply your tax rate to a portion of your child’s income instead of using the rate designated for the child.
Inclusion Clause: It may be possible to include the child’s income in your own tax return if all interest and dividends from the child total less than $10,000 in 2014. If this option applies, your child doesn’t have to file a return, but instead you can use Form 8814, Parents’ Election to Report Child’s Interest and Dividends.
Income Threshold: If the child’s income was over $10,000 for the 2014 tax year, the child is required to file a separate return from their parents. When filing the child’s tax return, parents should use Form 8615 Tax for Certain Children Who Have Investment Income.
Net Investment Income: This year, children who report income through Form 8615 may have to pay the Net Investment Income Tax. This tax imposes a 3.8% tax on either the net investment income or the remainder of the child’s AGI that is over a certain amount, depending on which is less. Form 8960 is used to determine the amount of Net Investment Income Tax required.