When Your Child Has Investment Income

It might not be something you think about until you receive a 1099 for your minor child. Your child has received investment income. What do you do with it, and how will it affect taxes?

If your child received investment income last year, you need to know about the special rules that can affect how much tax they pay and how they file taxes.

What is investment income? It can include the following:

• Interest – When you have money invested, you are loaning your money to a bank, a municipality, a company, etc. They pay you a fee, interest, in exchange for having the use of your money.
• Dividends – When you have money invested in a company as a shareholder, you receive a portion of that company’s profits.
• Capital Gains – When you sell property or an investment, you receive money from that sale. The difference between what you bought the item for and what you sell it for is considered a capital gain or loss.
• Unearned Income – This income could come from a trust fund. It is money on which social security tax and Medicare tax isn’t paid.

When you pay taxes on the investment income, the parents’ tax rate may apply instead of the child’s tax rate. If your child had more than $2,000 in investment income, part of that income may be taxed at your tax rate rather than your child’s. For more information, you can read the instructions on Form 8615, Tax for Certain Children Who Have Unearned Income.

If your child made less than $10,000 in investment income last year, you may be able to file the income on your tax return. If you file the income on your tax return, your child will not have to file a tax return. You can choose which way to report the income. The form you use is Form 8814, Parents’ Election to Report Child’s Interest and Dividends.

If your child made more than $10,000 in investment income last year, a separate tax return for the child is needed. You will have to file Form 8615, Tax for Certain Children Who Have Unearned Income with your child’s tax return.

Your child may have to pay Net Investment Income Tax. If you filed Form 8615 for your child, you can use Form 8960, Net Investment Income Tax — Individuals, Estates, and Trusts to calculate this tax.

Remember if your child has earned income (Wages, commissions other payment for services greater than $6,200) they must file a tax return.

You can find all of the regulations in IRS Publication 929, Tax Rules for Children and Dependents or you can ask our CPA’s for guidance. Contact Myerson & Myerson, CPA’s at (703)753-1040 or info1@mandmcpas.com today.

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