TAX TIPS Don't Include Child's Income on Your Return by Kevin McCormally
As one of its attempts to make the tax law family-friendly, Congress allows parents of kids younger than 14 to report the child's income on the parents' return -- rather than having to file a separate return for the child. This is permitted if the child's income is solely from interest and dividends (including capital gains distributions from a mutual fund) and is less than $7,500.
That might sound good, but you'll be better off saying "Thanks, but no thanks." It will probably be easier to fill out a return for your child. The short Form 1040A will suffice if your child's income would qualify to be reported on your return.
The Form 8814 -- which you must file with your own return if you include your child's income -- is a hassle to complete. And, reporting a kid's income on your return can cost the family money. On the 8814 form, for example, up to $750 of capital gains distributions or dividends that might be taxed at 5% on the child's return is sure to be taxed at 10%. If the parents owe an underpayment penalty, adding the child's income (and tax liability) to their return can hike that penalty. And, if the parents' income is high enough to cause a squeeze on the child credit, IRA deductions or the value of exemptions or itemized deductions, adding a child's income will tighten the vise.
However, if your child's investment income is more than $1,500, adding his or her income to your return will allow you to avoid completing the Form 8615, where you figure the "kiddie tax" for children under age 14. The kiddie tax applies the parents' tax rate to the child's income in excess of $1,500. Reporting the child's income on your return will automatically take care of that.
But, even if you have to mess with the kiddie tax, you'll probably find it easier to complete a 1040A and Form 8615 for your child, rather than using the Form 8814 to add the child's income to your return.
GETTING STARTED
