Tax on Income of Minor Children
Prior to 1986, parents found it beneficial to give income-earning assets to their minor children since the children were generally in a lower income tax bracket. The Tax Reform Act of 1986 contained provisions that limit the benefit of shifting income to certain minor children. The net unearned incomeunearned incomeIncome derived from sources other than wages, salary, self-employment, partnership; e.g., interest and dividends. of minor children may now be taxed at their parents’ rates. This parental tax rate now applies to children who are younger than 18 years old at the end of the year, have at least one living parent, and have “net unearned income” for the year. Although there is no statutory definition for a parent, the term is generally considered to mean a parent or step-parent of the child.
For purposes of determining the child’s income subject to the parental tax rate, net unearned income of a minor child is computed as follows:
| Unearned Income | $xxxx |
Less the greater of:
| (xxx) |
| Subtotal | $xxxx |
| Less statutory deduction | (900) |
| Net unearned income | $xxxx |
If the net unearned income is zero or less, the child’s tax is calculated using the child’s tax rate. However, if the amount is positive, the child’s tax is calculated by applying the parent’s tax rate, if higher, to that amount.
Example
Carrie and Carl have two children, Brie (age 6) and Brienna (age 9). Brie received $3,000 in interest income and Brienna received $1,900 in interest income during 2008. Brie and Brienna did not pay any investment expenses for the year. Carrie and Carl have taxable income for the year of $45,050. Brie and Brienna’s 2008 income tax is calculated as follows:
| Step 1: Calculate Net Unearned Income | Brie | Brienna |
|---|---|---|
| Unearned income | $3,000 | $1,900 |
| Less the greater of: | ||
| $900 (standard deduction), or | ||
| investment expenses | (900) | (900) |
| $2,100 | $1,000 | |
| Less statutory deduction | (900) | (900) |
| Net unearned income | $1,200 | $100 |
| Step 2: Calculate the Total Parental Tax | |
|---|---|
| Parents’ taxable income | $45,050 |
| Plus: the children’s net unearned income ($1,200 + $100) | 1,300 |
| Revised taxable income | $46,350 |
| Tax on revised income (from tax rate schedule) | $6,154 |
| Tax on parent’s regular income ($45,050) | (5,959) |
| Total parental tax | $199 |
| Step 3: Allocate Total Tax | ||
|---|---|---|
| Brienna’s parental tax = [$100/($1,200 + $100)] × $195 = | $15 | |
| Brie’s parental tax = [$1,200/($1,200 + $100)] × $195 = | $180 | |
| Step 4: Calculate Total Tax | Brie | Brienna |
|---|---|---|
| Adjusted gross income | $3,000 | $1,900 |
| Less: personal exemption | 0 | 0 |
| Less: standard deduction | (900) | (900) |
| Taxable income | $2,100 | $1,000 |
| Less: net unearned income | (1,200) | (100) |
| Regular taxable income | $900 | $900 |
| Regular tax on $900 | $91 | $91 |
| Plus allocable parental tax | $180 | $15 |
| Total tax | $271 | $106 |
Both Brie and Brienna must include a Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800, with their individual income tax returns.
If a child’s parents are divorced, the taxable income of the parent with custody is used to calculate the parental tax. Also, if married parents file separate returns, the parent’s return with the larger amount of taxable income is used in the calculation.
If certain conditions are met, parents may elect to include a child’s (under 18) gross income on the parents’ tax return. The election eliminates the child’s return filing requirements and saves the parents the trouble of filing the special calculation Form 8615 for the “Kiddie tax.” To qualify for this election the following conditions must be met:
The child’s gross income is from interest and dividends only.
The gross income is more than $900 and less than $9,000.
No estimated tax has been paid for the child and the child is not subject to backup withholding.
Example
Ben is 14 years old and has $2,300 of interest from a savings account. Ben has no other income. Instead of completing the Kiddie tax form (Form 8615) and paying the tax on the $2,300 in income, Ben’s parents may elect to include the $2,300 on their tax return. Ben will not be required to file a return. The election to include the income of a minor child on a parent’s return is made on Form 8814.
Go to Publication 17 and read Chapter 31: Tax on Investment Income of Certain Minor Children.
Questions and Problems
Josh transferred a bond worth $20,000 to his daughter, Kathy. During the year, the stock paid Kathy $900 in interest. Assuming Kathy has no other income, how much income tax will she have to pay?
$0
$6
$90
$91
Some other amount
Sandi and Stan have an 11-year-old child, Stephanie. For 2008, Sandi and Stan have taxable income of $52,000, and Stephanie has nonqualifying dividend income of $4,500 and investment expenses of $250. No election is made to include Stephanie’s income on her parents’ return.
For purposes of the parental tax, calculate Stephanie’s net unearned income. $__________
Calculate the amount of Stephanie’s parental tax. $__________
Calculate Stephanie’s total tax. $__________
Tony and Wilma have two children, Tatyana (age 6) and Trisha (age 8). For purposes of the parental tax, Tatyana has net unearned income of $6,000 and Trisha has net unearned income of $9,000. Assuming that their total parental tax is $3,600, allocate the total parental tax to Tatyana and Trisha.
Tatyana’s parental tax $__________ Trisha’s parental tax $__________
