24.1 Filing Your Child’s Return

To discourage substantial income splitting of investment income between parents and minor children, the tax law has complicated income reporting for parents and children by—

1. Imposing a “kiddie tax” that taxes a child’s investment income over an annual floor ($1,900 for 2012) at the parent’s tax bracket. The kiddie tax applies not only to children under age 18, but also to most 18-year-olds and students under age 24 (24.2).
2. Barring a dependent child (21.1) from claiming a personal exemption on his or her own tax return.
3. Limiting the standard deduction for a dependent child who has only investment income. For 2012 the deduction is $950 (13.5).

Does your child have to file?

For a child who can be claimed as a dependent either as a qualifying child or a qualifying relative (21.1), the income filing threshold for 2012 is generally $950. If your dependent child has gross income (earned and investment income) of $950 or less for 2012, he or she is not subject to tax and does not have to file a tax return.

A 2012 return must be filed for a dependent child with investment income exceeding $300 and gross income of more than $950. If a dependent child has salary or other earned income but no investment income, a return does not have to be filed unless such earned income exceeds $5,950 in 2012. If your child’s only income is from interest and dividends, you may be able to make an election to report the income on your own return (24.4).

Although a dependent child may not claim a personal exemption on his or her 2012 tax return, the child is allowed to claim at least a $950 standard deduction. A dependent child with earned income over $950 may claim a standard deduction up to those earnings plus an additional $300, but no more than the basic standard deduction, which is generally $5,950 (13.1).

How to file a 2012 return for your child.

If your child is not subject to the “kiddie tax” under the rules at 24.2, follow the regular filing rules and use Form 1040EZ, 1040A, or Form 1040 to report the child’s income and deductions. Since the “kiddie tax” computation does not apply, all of the child’s income will be taxed at his or her own tax rate. If your child is unable to sign his or her tax return, you must do so (1.13).

If the kiddie tax computation applies (24.2), Form 8615 must be filed to compute the kiddie tax unless your child’s only income is interest and dividends and you elect to report your child’s investment earnings on your own return (24.4). On Form 8615 you must provide your Social Security number and taxable income. Form 8615 is attached to the child’s tax return (24.3).

Child’s AMT liability.

A child who has substantial tax-exempt interest, tax preferences, or tax adjustments subject to the alternative minimum tax must compute tentative AMT liability on Form 6251; see Chapter 23.

EXAMPLES
1. Your 14-year-old daughter, whom you claim as your dependent, has interest and dividend income of $480 and no other income for 2012. She has no income tax liability and does not have to file a return.
Interest and dividend income $480
  Less: standard deduction (13.5)   950
Tax liability       0
2. In 2012, your 17-year-old daughter, whom you claim as your dependent, has interest income of $700 and qualified dividends (4.2) of $450. Her taxable income is $200.
Interest income     $700
Qualified dividends       450
 $1,150
   Less: standard deduction       950
Taxable income     $200
You must file a Form 1040A or 1040 for your daughter because she has taxable income, but the kiddie tax computation does not apply because her investment income does not exceed $1,900. On the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, the $200 of taxable income will be attributed to the interest income and subject to your daughter’s 10% tax rate and the qualified dividends will not be taxed at all because the 0% rate for qualified dividends and capital gains applies (4.2).
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