Ramifications of Childrens Income

Being a parent with four kids and one on the way prompted me to address the tax ramifications of your children’s income. Believe it or not, sometimes your child’s income must be included on your federal income tax return. In other circumstances they may be taxed at your income tax rate even though they may file their own return. The dividing line is whether the child’s income is earned income or investment income. Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income. The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meets one of three age requirements for 2009:

  • The child was born after January 1, 1992.
  • The child was born after January 1, 1991, and before January 2, 1992, and has earned income that does not exceed one-half of their own support for the year.
  • The child was born after January 1, 1986, and before January 2, 1991, and a full-time student with earned income that does not exceed one-half of the child’s support for the year.

When certain conditions are met, a parent may be able to avoid filing a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents’ Election To Report Child’s Interest and Dividends and thereby avoid filing multiple tax returns. Taxation at the parent’s rates is not an issue for the earned income of a child. For example, money earned for a paper route (do kids these days still have paper routes?!), babysitting and the like would qualify. It seems like only the “good” kids who put that money into savings get wacked at the parents’ rate. So, in the end, I guess the government in their infinite wisdom is telling the youth of the country not save what they make or they will be taxed just like their parents.”