Instead of filing a separate tax return to report their children’s investments, some taxpayers elect to simply report the details on their own return and include Form 8615. While this option may appear to be more convenient, it may not be the most economical way to file. The following outlines the advantages and disadvantages of filing a child tax return.
Electing Not to File a Child Tax Return
Under certain conditions, parents may able to forego filing a separate tax return for children who are under age 19 or are a full-time student up to age 24. The requirements are:
- The child’s dividend and income must be less than $10,000 for the year.
- The child’s income must only come from dividends and interest, including Alaska Permanent Fund dividends and capital gains distributions.
- There can be no estimated tax payments or prior year’s tax overpayment applied to the current tax year under the child’s name and Social Security Number.
- No federal income tax must have been withheld from the child’s income under backup withholding.
- The child must file a return unless the parent decides to file Form 8615.
- The child may not file a joint return for the year.
- The parent must make the election or file a joint return with the child’s other parent.
Reasons Not to Make the Election
One major drawback to making the election is the possibility of increasing the family’s tax liability. Typically, long-term capital gains and qualified dividends between $1,000 and $2,000 of unearned income qualify for the zero percent tax rate as opposed to ten percent. Therefore, the parents’ tax liability may increase by as much as $1,000. The child also does not qualify for write-offs for charitable donations and other possible deductions. Furthermore, including a child’s investment income may raise the parents’ adjusted gross income, which can reduce tax savings.
Parents who are attempting to weigh the costs and benefits of foregoing filing a child tax return should consult their CPA for assistance in understanding the potential impacts if their decision. Gary M. Kaplan is a seasoned CPA who is able to advise and assist individuals, families, and businesses with virtually any tax situation. Taxpayers in Florida, Maryland, Utah, New York, and Washington, D.C. are encouraged to contact Mr. Kaplan at 1 (866) 643-4560 to receive a free consultation.
