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Back to Basics Part XXVIII – Forms 8814 and 8615 – Reporting a Child’s Investment Income/Kiddie Tax
Filed under: Back to Basics, General | Tags: Form 8615, Form 8814, Kiddie Tax, Parents' Election to Report Child's Interest and Dividends, Tax for Certain Children Who Have Unearned Income, unearned income
Leave a comment Originally published in the Cedar Street Times
November 27, 2015
In order to prevent people in higher tax brackets than their children from shifting money into their children’s names in order to pay tax at a lower rate, “Kiddie Tax” rules were enacted. The government also allows you to simplify reporting in some cases where filing a separate return for children with a small amount of income is burdensome.
The quick summary is that if your child has less than $1,050 of unearned income (and assuming there is not enough earned income to trigger a filing requirement), there will be no tax paid on the unearned income, and nothing to file.
If there is over $1,050 and $2,100 of unearned income, the amount will be taxed at the child’s rate. In this case , the child can file his or her own tax return or the parent has the option of filing a Form 8814 – “Parent’s Election to Report Child’s Interest and Dividends” to avoid filing a separate return for the child, and just report the tax on the parents’ return.
If the child has over $2,100 of unearned income, the parent can still file either way, but the amount over $2,100 will be taxed at the parents’ rate. If the parents elect to file on their return using Form 8814, the calculation to tax at the parent’s rate for the income over $2,100 is included on that form. If a return is filed for the child, instead, then a Form 8615 – “Tax for Certain Children Who Have Unearned Income” will need to be filed with the child’s return to perform the additional tax calculations.
In order to qualify to File Form 8814, your dependent child would have to be under age 19 (or under age 24 if a full-time student during at least five months of the year) to qualify. A quirky rule to watch out for is if you have a child with a January 1 birthday. In this case, on December 31 of each year they are considered to be another year older. So if your child turned 18 on January 1, 2015, the child would be considered 19 at the end of the day on December 31 and thus not under age 19 for tax year 2015. (They are the only birthday that gets the short-end of the stick!)
Unearned income is defined as interest, tax-exempt interest, dividends, capital gains distributions from mutual funds, net capital gains from sales, rents, royalties, taxable Social Security or pension benefits, taxable scholarships, unemployment income, alimony, and the like. Note that capital gains distributions come from mutual funds, and they represent your share of the buying a selling inside the mutual fund which you have no control over. The short-term sales actually get reported as dividends, and the long-term sales get reported as capital gains distributions. Net capital gains would be the aggregate of your gains and losses from the direct sale of a particular stock or bond, or the mutual fund itself in your account.
As summarized earlier, if your child has over the $1,050 of unearned income, you may wish to simplify and not file a separate return for the child. The parents may elect to file (with the parents’ tax return) a Form 8814 – “Parents’ Election to Report Child’s Interest and Dividends” if the child’s only unearned income was from interest, dividends, and capital gains distributions (note that rents, scholarships, unemployment, etc. are not included) and his or her gross income is less than $10,500. Otherwise you have to file for the child. There are a few other requirements as well which you can read about in the instructions to the form. The first $1,050 will not be taxed, but the rate on the child’s income between $1,050 and $2,100 will be ten percent. The amount of tax is transferred from the bottom of the Form 8814 and added to the parent’s tax on Line 44 of Form 1040.
Keep in mind, that in some cases, you are better off still filing the child’s tax return even though you have the option to report it on your return, due to other tax incentives and credits the child may be eligible to receive.
If the child has over $2,100 of unearned income, the parents can still elect to file the child’s return with their return. If they decide to file a separate return for the child using Form 8615 – “Tax for Certain Children Who Have Unearned Income,” the form will take the parent’s taxable income and add to it the child’s taxable income. Using this combined amount the appropriate tax bracket is used to determine the additional tax related the child’s portion of the income. This amount is added to Form 1040 Line 44 of the child’s return as additional tax, and the Form 8615 is attached to the child’s tax return.
If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .
Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part XXVII – Schedule 8812 – Child Tax Credit
Filed under: Back to Basics | Tags: Additional Child Tax Credit, adoption, child tax credit, foster, income phase-out, Modified Adjusted Gross Income, Schedule 8812, Sesame Street, tax credits
Leave a comment Originally published in the Cedar Street Times
November 13, 2015
I believe the IRS was having an off-day when they created the “Schedule 8812 – Child Tax Credit.” First, why did they call it a “Schedule?” Anyone who grew up with Sesame Street during the past 40 years inevitably knew the song, “One of these things is not like the others…” and then you would have to pick out the one thing that was different on the TV screen. Okay, it’s time for you to play: Form 1045, Form 2106, Form 3903, Form 6251, Schedule 8812, Form 8829, Form 9465. Did you figure it out? In my tax software there are well over 100 four-digit forms to choose from, and I believe the 8812 is the only one called a “Schedule.” Schedules, on the other hand, all start with letters, such as Schedule A, Schedule B, Schedule C, etc.
The second reason I think the IRS was having an off-day, is that the name of the form – “Child Tax Credit,” is somewhat of a misnomer. There are two related, but distinct credits, the “Child Tax Credit,” and the “Additional Child Tax Credit.” For the vast majority of people the Child Tax Credit is determined on the Child Tax Credit worksheets in Publication 972. The Additional Child Tax Credit is the one generally figured on the double poorly named, “Schedule 8812 – Child Tax Credit.”
So what are these credits and how can you get them? The child tax credit is a nonrefundable tax credit up to $1,000 per child, and the Additional Child Tax Credit is a refundable tax credit that may be available if you qualified for the child tax credit but could not use some or any of the credit because you did not owe much or any tax. Whenever you hear of a refundable tax credit, think fraudulent returns – because lots of them are filed whenever scammers figure they can get something for nothing. Also remember, that tax credits are much more valuable than tax deductions. Credits are a dollar-for dollar reduction of tax, whereas deductions just reduce the income upon which the tax is calculated. So credits could be three to ten times more valuable than deductions depending on your tax bracket.
I know many of you are thinking, “What a deal! At an annual $1,000 a pop, where can I get more kids?” Well, you can certainly birth them, adopt them, or foster them (through a court or qualified agency). You could also get one or both of your parents to have another child and give it to you, or you could even have a step-parent give you his or her children to raise, or any of the decedents of these two categories. The reverse is also true…parents, you can sweet talk your kids into having their own children to give to you, or if you are already a grandparent, just keep the grandkids the next time they are dropped off and don’t give them back! There are so many wonderful options! Please make sure the children are under 17; make sure they are U.S. citizens, U.S. nationals or U.S. resident aliens; and make sure that you meet all the tests to claim them as dependents as well.
You also cannot make too much money in order to qualify for the credit. If you are Married Filing Joint you start to lose the $1,000 per child tax credit when your combined incomes hit $110,000. By $130,000 it has been ratably phased-out. If you are filing head of household, your phase-out range for the credit is $75,000 – $95,000 of modified adjusted gross income.
As mentioned earlier, if you qualify for the child tax credit, but you have more credit than tax owed to offset, you may be able to pick this difference up through the Additional Child Tax Credit and actually get a refund for money you never paid in to begin with. In order to qualify for the Additional Tax Credit you do need to work. The calculations are such that you need to have at least $3,000 of earned income (not investment or retirement income) to get anything. You need to have about $10,000 of earned income to max out the credit if you have one child, and approximately an additional $7,000 for each additional child in order to max out the $1,000 per child credit.
There are lots of nuances to these rules depending on your circumstances, but they are fairly well addressed in the worksheets and the instructions when you actually go to fill them out. Again, Publication 972 houses the Child Tax Credit worksheets (about 5-6 pages of worksheets) to see if you qualify for the Child Tax Credit. Then, if you cannot utilize all of the credit for which you qualify due to income tax liability limitations, then you go to Schedule 8812 Child Tax Credit to see if you can qualify for the refundable Additional Child Tax Credit.
The Schedule 8812 is only 1-1/2 pages long. Part I of the schedule is only used if your children do not have Social Security Numbers, and have ITINs instead. Part II is the section where most people will go to calculate the Additional Child Tax Credit. Part III is a special section for super humans that have three or more qualifying children.
In the meantime, I will be eagerly awaiting to see if a reader can enlighten me on some history that might explain the anomaly naming convention of Schedule 8812 – Child Tax Credit!
If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .
Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
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