| Pub. 17, Your Federal Income Tax |
2004 Tax Year |
Chapter 33 - Tax on Investment Income of Certain Minor Children
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
What's New
Investment income of child under age 14. The amount of taxable investment income a child under age 14 can have without it being subject to tax at the parent's rate
has increased to $1,600
(previously $1,500).
Introduction
This chapter discusses the following two rules that may affect the tax on certain investment income of a
child under age 14.
-
If the child's interest and dividend income total less than $8,000, the child's parent may be able to choose to include that
income
(including capital gain distributions) on the parent's return rather than file a return for the child. (See Parent's Election To Report Child's
Interest and Dividends, later.)
-
If the child's interest, dividends, and other investment income total more than $1,600, part of that income may be taxed at
the parent's tax
rate instead of the child's tax rate. (See Tax for Children Under Age 14 Who Have Investment Income of More Than $1,600,
later.)
For these rules, the term “child” includes a legally adopted child and a stepchild. These rules apply whether or not the child is a
dependent.
These rules do not apply if:
-
The child is not required to file a tax return, or
-
Neither of the child's parents were living at the end of the tax year.
Useful Items - You may want to see:
Form (and Instructions)
-
8615
Tax for Children Under Age 14 With Investment Income of More Than $1,600
-
8814
Parents' Election To Report Child's Interest and Dividends
Which Parent's Return To Use
If a child's parents are married to each other and file a joint return, use the
joint return to figure the tax on the investment income of a child under age 14. The tax rate and other return information
from that return are used
to figure the child's tax as explained later under Tax for Children Under Age 14 Who Have Investment Income of More Than $1,600.
Parents Who Do Not File a Joint Return
For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure
the tax. Only the
parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends.
Parents are married.
If the child's parents file separate returns, use the return of the parent with the greater taxable income.
Parents not living together.
If the child's parents are married to each other but not living together, and the parent with whom the child lives
(the custodial parent) is
considered unmarried, use the return of the custodial parent. If the custodial parent is not considered unmarried, use the
return of the parent with
the greater taxable income.
For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in
chapter 2.
Parents are divorced.
If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater
part of the year (the
custodial parent) has not remarried, use the return of the custodial parent.
Custodial parent remarried.
If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's
other parent. Therefore, if
the custodial parent and the stepparent file a joint return, use that joint return. Do not use the return of the noncustodial
parent.
If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with
the greater taxable income. If
the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together
applies.
Parents never married.
If a child's parents did not marry each other, but lived together all year, use the return of the parent with the
greater taxable income. If the
parents did not live together all year, the rules explained earlier under Parents are divorced apply.
Widowed parent remarried.
If a widow or widower remarries, the new spouse is treated as the child's other parent. The rules explained earlier
under Custodial parent
remarried apply.
Parent's Election To Report Child's Interest and Dividends
You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your
tax return. If you do,
your child will not have to file a return.
You can make this election for 2004 only if all the following conditions are met.
-
Your child was under age 14 at the end of 2004. (A child born on January 1,1991, is considered to be age 14 at the end of
2004. You cannot
make the election for this child.)
-
Your child is required to file a return for 2004, unless you make this election.
-
Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund
dividends).
-
The dividend and interest income was less than $8,000.
-
No estimated tax payment was made for 2004 and no 2003 overpayment was applied to 2004 under your child's name and social
security
number.
-
No federal income tax was taken out of your child's income under the backup withholding rules.
-
You are the parent whose return must be used when applying the special tax rules for children under age 14. (See Which Parent's Return
To Use, earlier.)
These conditions are also shown in Figure 33-A.
How to make the election.
Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. (If you make this election, you cannot
file Form 1040A or Form 1040EZ.)
Attach a separate Form 8814 for each child for whom you make the election. You can make the election for one or more children
and not for others.
Effect of Making the Election
The federal income tax on your child's income may be more if you make the Form 8814 election.
Rate may be higher.
If your child received qualified dividends or capital gain distributions, you may pay up to $40 more tax if you make
this election instead of
filing a separate tax return for the child. This is because the tax rate on the child's income between $800 and $1,600 is
10% if you make this
election. However, if you file a separate return for the child, the tax rate may be as low as 5% because of the preferential
tax rates for qualified
dividends and capital gain distributions.
Deductions you cannot take.
By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled
to on his or her return.
-
The higher standard deduction for a blind child.
-
The deduction for a penalty on an early withdrawal of your child's savings.
-
Itemized deductions (such as your child's investment expenses or charitable contributions).
Reduced deductions or credits.
If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return
including the following.
-
Deduction for contributions to a traditional individual retirement arrangement (IRA).
-
Deduction for student loan interest.
-
Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses.
-
Total itemized deductions.
-
Personal exemptions.
-
Credit for child and dependent care expenses.
-
Child tax credit.
-
Education tax credits.
-
Earned income credit.
Penalty for underpayment of estimated tax.
If you make this election for 2004 and did not have enough tax withheld or pay enough estimated tax to cover the tax
you owe, you may be subject to
a penalty. If you plan to make this election for 2005, you may need to increase your federal income tax withholding or your
estimated tax payments to
avoid the penalty. See chapter 5 for more information.
Use Part I of Form 8814 to figure your child's interest and dividend income to report on
your return. Only the amount over $1,600 is added to your income. This amount is shown on line 6 of Form 8814. Include this
amount on line 21 of Form
1040 or Form 1040NR. Enter “Form 8814” in the space next to line 21. If you file more than one Form 8814, include the total amounts from line 6
of all your Forms 8814 on line 21.
Capital gain distributions and qualified dividends.
If your child's dividend income included any capital gain distributions see Capital gain distributions under Figuring Child's
Income in Part 2 of Publication 929. If your child's dividend income included any qualified dividends, see Qualified dividends under
Figuring Child's Income in Part 2 of Publication 929.
Use Part II of Form 8814 to figure the tax on the $1,600 of your child's interest and dividends that you do not include in
your income. This tax is
added to the tax figured on your income.
This additional tax is the smaller of:
Include the amount from line 9 of all your Forms 8814 in the total on Form 1040, line 43, or Form 1040NR, line 40. Check box
a on Form 1040, line
43, or Form 1040NR, line 40.
David and Linda Parks are married and will file separate tax returns for 2004. Their only child, Philip, is 8. Philip received
a Form 1099-INT
showing $3,240 taxable interest income and a Form 1099-DIV showing $360 ordinary dividends. All the dividends were qualified
dividends. His parents
decide to include that income on one of their returns so they will not have to file a return for Philip.
First, David and Linda each figure their taxable income (Form 1040, line 42) without regard to Philip's income. David's taxable
income is $41,700
and Linda's is $59,300. Because her taxable income is greater, Linda can elect to include Philip's income on her return. See
Which Parent's
Return To Use, earlier.
On Form 8814 (see illustrated form), Linda enters her name and social security number, then Philip's name and social security
number. She enters
Philip's taxable interest income, $3,240, on line 1a. Philip had no tax-exempt interest income, so she leaves line 1b blank.
She enters Philip's
ordinary dividends, $360, on line 2. Philip did not have any capital gain distributions, so she leaves line 3 blank.
Linda adds lines 1a and 2 and enters the result, $3,600, on line 4. Because Philip had qualified dividends, Linda must use
the Child's Qualified
Dividends and Capital Gain Distributions Worksheet to figure the amount to enter on line 6, instead of subtracting line 5
from line 4. The amount she
enters on line 6 is $1,800, the amount from line 11 of the worksheet. On the dotted line next to line 6, she enters “QD–$200,” the amount
from line 8 of the worksheet. She includes that amount ($200) on lines 9a and 9b of her Form 1040. On the dotted line next
to lines 9a and 9b, she
enters “Form 8814–$200.”
Linda includes $1,800 in the total on line 21 of her Form 1040 (not illustrated) and in the space next to that line enters
“Form
8814–$1,800.” Adding that amount, plus the $200 of qualified dividends, to her income increases each of the amounts on lines 22, 36, 37,
40,
and 42 of her Form 1040 by $2,000. Linda is not claiming any deductions or credits that are affected by the increase to her
income. Therefore, her
revised taxable income on line 42 is $61,300 ($59,300 + $200 + $1,800).
On Form 8814, Linda subtracts the $800 shown on line 7 from the $3,600 on line 4 and enters the result, $2,800, on line 8.
Because that amount is
not less than $800, she enters $80 on line 9. This is the tax on the first $1,600 of Philip's income, which Linda did not
have to add to her income.
She must add this additional tax to the tax figured on her revised taxable income.
The tax on her $61,300 revised taxable income is $12,150. She adds $80, and enters the $12,230 total on line 43 of Form 1040,
and checks box a.
Linda attaches Form 8814 to her Form 1040.
Tax for Children Under Age 14 Who Have Investment Income of More Than $1,600
Part of a child's 2004 investment income may be subject to tax at the parent's tax rate if all of the following statements
are true.
-
The child was under age 14 at the end of 2004. (A child born on January 1, 1991, is considered to be age 14 at the end of
2004. This child's
investment income is not taxed at the parent's rate.)
-
The child's investment income was more than $1,600.
-
The child is required to file a return for 2004.
These conditions are also shown in Figure
33-B .
If neither parent was alive on December 31, 2004, do not use Form 8615. Instead, figure the child's tax in the normal manner.
If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the
child's tax. Attach the
completed form to the child's Form 1040, Form 1040A, or Form 1040NR.
The following discussions explain the parental information needed for Form 8615 and the steps to follow in figuring the child's
tax. Form 8615 is
illustrated later.
Providing Parental Information (Form 8615, lines A–C)
On Form 8615, lines A and B, enter the parent's name and social security number. (If the parents filed a joint return, enter
the name and social
security number listed first on the joint return.) On line C, check the box for the parent's filing status.
See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on
Form 8615.
Parent with different tax year.
If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's
return for the tax year that
ends in the child's tax year.
Parent's return information not known timely.
If the information needed from the parent's return is not known by the time the child's return is due (usually April
15), you can file the return
using estimates.
You can use any reasonable estimate. This includes using information from last year's return. If you use an estimated
amount on Form 8615, enter
“ Estimated” on the line next to the amount.
When you get the correct information, file an amended return on Form 1040X, Amended U.S. Individual
Income Tax Return.
Instead of using estimated information, you may want to request an extension of time to file. Extensions are discussed
in chapter 1.
Step 1. Figuring the Child's Net Investment Income (Form 8615, Part I)
The first step in figuring a child's tax using Form 8615 is to figure the child's net investment income. To do that, use Form
8615, Part I.
Line 1 (investment income).
If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Adjusted
gross income is shown on line
37 of Form 1040, line 22 of Form 1040A, or line 35 of Form 1040NR. Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615
must be filed.
If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions
for the form.
However, if the child has excluded any foreign earned income or deducted either a loss from self-employment or a net
operating loss from another
year, use the Alternate Worksheet for Line 1 of Form 8615 in Publication 929 to figure the amount to enter on Form 8615, line
1.
Investment income defined.
Investment income is generally all income other than salaries, wages, and other amounts received as pay for work actually
done. It includes taxable
interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension
payments, and certain
distributions from trusts. Investment income includes amounts produced by assets the child obtained with earned income (such
as interest on a savings
account into which the child deposited wages).
Nontaxable income.
For this purpose, investment income includes only amounts that the child must include in total income. Nontaxable
investment income, such as
tax-exempt interest and the nontaxable part of social security and pension payments, is not included.
Income from property received as a gift.
A child's investment income includes all income produced by property belonging to the child. This is true even if
the property was transferred to
the child, regardless of when the property was transferred or purchased or who transferred it.
A child's investment income includes income produced by property given as a gift to the child. This includes gifts
to the child from grandparents
or any other person and gifts made under the Uniform Gift to Minors Act.
Example.
Amanda Black, age 13, received the following income.
-
Dividends — $600
-
Wages — $2,100
-
Taxable interest — $1,200
-
Tax-exempt interest — $100
-
Net capital gains — $100.
The dividends were on stock given to her by her grandparents.
Amanda's investment income is $1,900. This is the total of the dividends ($600), taxable interest ($1,200), and net capital
gains ($100). Her wages
are earned (not investment) income because they are received for work actually done. Her tax-exempt interest is not included
because it is nontaxable.
Trust income.
If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other investment
income from the trust
are investment income to the child.
Line 2 (deductions).
If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $1,600 on line 2.
If the child does itemize deductions, enter on line 2 the larger of:
Directly connected.
Itemized deductions are directly connected with the production of investment income if they are for expenses paid
to produce or collect taxable
income or to manage, conserve, or maintain property held for producing income. These expenses include custodian fees and service
charges, service fees
to collect taxable interest and dividends, and certain investment counsel fees.
These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Only the amount
greater than 2% of the
child's adjusted gross income can be deducted. See chapter 30 for more information.
Example 1.
Roger, age 12, has investment income of $8,000, no other income, no adjustments to income, and itemized deductions of $300
(net of the
2%-of-adjusted-gross-income limit) that are directly connected with his investment income. His adjusted gross income is $8,000,
which is entered on
Form 1040, line 37, and on Form 8615, line 1. Line 2 is $1,600 because that is more than the sum of $800 and his directly-connected
itemized
deductions of $300.
Example 2.
Eleanor, 8, has investment income of $16,000 and an early withdrawal penalty of $100. She has no other income. She has itemized
deductions of
$1,050 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with the production of her investment income.
Her adjusted gross
income, entered on line 1, is $15,900 ($16,000 - $100). The amount on line 2 is $1,850. This is the larger of:
Line 3.
Subtract line 2 from line 1 and enter the result on this line. If zero or less, do not complete the rest of the form.
However, you must still
attach Form 8615 to the child's tax return. Figure the tax on the child's taxable income in the normal manner.
Line 4 (child's taxable income).
Enter on line 4 the child's taxable income from Form 1040, line 42; Form 1040A, line 27; or Form 1040NR, line 39.
Line 5 (net investment income).
A child's net investment income cannot be more than his or her taxable income. Enter on line 5 the smaller of line
3 or line 4 of Form 8615. This
is the child's net investment income.
If zero or less, do not complete the rest of the form. However, you must still attach Form 8615 to the child's tax
return. Figure the tax on the
child's taxable income in the normal manner.
Step 2. Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II)
The next step in completing Form 8615 is to figure a tentative tax on the child's net investment income at the parent's tax
rate. The tentative tax
at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net investment
income (plus the net
investment income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured
without it.
When figuring the tentative tax at the parent's tax rate, do not refigure any of the exclusions, deductions, or credits on
the parent's return
because of the child's net investment income. For example, do not refigure the medical expense deduction.
Figure the tentative tax on Form 8615, lines 6 through 13.
Note.
If the child has any capital gains or losses, get Publication 929 for help in completing Part II of Form 8615.
Line 7 (net investment income of other children).
If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total
of the amounts from line 5 of
all the other children's Forms 8615. Do not include the amount from line 5 of the Form 8615 being completed.
Example.
Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. The
children's net investment
income amounts on line 5 of their Forms 8615 are:
-
Sharon — $800
-
Jerry — $600
-
Mike — $1,000
Line 7 of Sharon's Form 8615 will show $1,600 ($600 + $1,000), the total of the amounts on line 5 of Jerry's and Mike's Forms
8615.
Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000).
Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600).
Other children's information not available.
If the net investment income of the other children is not available when the return is due, either file the return
using estimates or get an
extension of time to file. See Parent's return information not known timely, earlier.
Line 11 (tentative tax).
Subtract line 10 from line 9 and enter the result on this line. This is the tentative tax.
If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13.
Lines 12a and 12b (dividing the tentative tax).
If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each
child's share of the total net
investment income. This is done on lines 12a, 12b, and 13. Add the amount on line 7 to the amount on line 5 and enter the
total on line 12a. Divide
the amount on line 5 by the amount on line 12a and enter the result as a decimal on line 12b.
Example.
In the earlier example under Line 7 (net investment income of other children), Sharon's Form 8615 shows $1,600 on line 7. The amount
entered on line 12a is $2,400, the total of lines 5 and 7 ($800 + $1,600). The decimal on line 12b is .333, figured as follows
and rounded to three
places.
Step 3. Figuring the Child's Tax (Form 8615, Part III)
The final step in figuring a child's tax using Form 8615 is to determine the larger of:
-
The total of:
-
The child's share of the tentative tax based on the parent's tax rate, plus
-
The tax on the child's taxable income in excess of net investment income, figured at the child's tax rate, or
-
The tax on the child's taxable income, figured at the child's tax rate.
This is the child's tax. It is figured on Form 8615, lines 14 through 18.
Alternative minimum tax.
A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment
under the tax law. See
Alternative Minimum Tax in chapter 32.
For more information on who is liable for AMT and how to figure it, get Form 6251. For
information on special limits that apply to a child who files Form 6251, Alternative Minimum Tax—Individuals, see Alternative Minimum Tax
in Publication 929.
The following example includes a completed Form 8615. Form 1040A is not shown.
John and Laura Brown have one child, Sara. She is 13 and has $2,800 taxable interest income and $1,500 earned income. She
does not itemize
deductions. John and Laura file a joint return with John's name and social security number listed first. They claim three
exemptions, including an
exemption for Sara, on their return.
Because Sara is under age 14 and has more than $1,600 investment income, part of her income may be subject to tax at her parents'
rate. A completed
Form 8615 must be attached to her return.
Sara's father, John, fills out Sara's return for her.
John enters his name and social security number on Sara's Form 8615 because his name and number are listed first on the joint
return he and Laura
are filing. He checks the box for married filing jointly.
He enters Sara's investment income, $2,800, on line 1. Sara does not itemize deductions, so John enters $1,600 on line 2.
He enters $1,200 ($2,800
- $1,600) on line 3.
Sara's taxable income, as shown on line 27 of her Form 1040A, is $2,550. This is her total income ($4,300) minus her standard
deduction ($1,750).
Her standard deduction is limited to the amount of her earned income plus $250. John enters $2,550 on line 4.
John compares lines 3 and 4 and enters the smaller amount, $1,200, on line 5.
John enters $48,000 on line 6. This is the taxable income from line 42 of their joint Form 1040 return. Sara is an only child,
so line 7 is blank.
He adds line 5 ($1,200), line 6 ($48,000), and line 7 (blank), and enters $49,200 on line 8.
Using the column for married filing jointly in the Tax Table, John finds the tax on $49,200. He enters the tax, $6,669, on
line 9. He enters $6,489
on line 10. This is the tax from line 43 of John and Laura's Form 1040. He enters $180 on line 11 ($6,669 - $6,489).
Because line 7 is blank, John skips lines 12a and 12b and enters $180 on line 13.
John subtracts line 5 ($1,200) from line 4 ($2,550) and enters the result, $1,350, on line 14. Using the column for single
filing status in the Tax
Table, John finds the tax on $1,350 and enters this tax, $136, on line 15. He adds lines 13 ($180) and 15 ($136) and enters
$316 on line 16.
Using the column for single filing status in the Tax Table, John finds the tax on $2,550 ( line 4) and enters this tax, $256,
on line 17.
John compares lines 16 and 17 and enters the larger amount, $316, on line 18 of Sara's Form 8615. He also enters that amount
on line 28 of Sara's
Form 1040A.
John also completes Schedule 1 (Form 1040A) for Sara.
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