24.3 Computing “Kiddie Tax” on Child’s Return

If your child is subject to the “kiddie tax” (24.2) for 2012, your child’s regular income tax liability is computed on Form 8615, which is attached to his or her return, unless you make the parent’s election to report the child’s dividends and interest income on your own return (24.4). Before your child’s Form 8615 can be completed, your own taxable income and regular income tax must be determined. When you make the computation on Form 8615 for your child, you add your taxable income to your child’s net investment income in excess of $1,900. You figure the tax on the combined amount based on your filing status, using the Qualified Dividends and Capital Gain Tax Worksheet (or, if applicable, the Schedule D Tax Worksheet) if the combined amount includes net capital gain or qualified dividends (5.3). The excess of the resulting tax over your own separately figured tax liability is generally the kiddie tax on the child’s investment income exceeding $1,900. That tax, plus the tax on the portion of the child’s taxable income not subject to the kiddie tax, is reported as the child’s regular tax liability on his or her Form 1040 or 1040A.

Planning Reminder

Prepare Your Return First

Before your child can complete Form 8615, or you prepare it for the child, your own taxable income and regular income tax liability must be determined.

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As parents, the kiddie tax computation on Form 8615 does not affect your tax liability or the way you compute any limitation on deductions or credits. For example, the addition of the child’s net investment income to your taxable income on Form 8615 does not affect the adjusted gross income floors for purposes of figuring your deduction for IRA contributions, medical expenses, or miscellaneous expenses.

Which parent’s return to use.

If the parents file a joint return, their joint taxable income is entered on Form 8615, along with the net investment income (24.2) of all their children subject to the kiddie tax. If the parents file separate returns, the larger of the parents’ separate taxable incomes is used on the child’s Form 8615.

Where parents are legally separated or divorced and custody of the child is shared, Form 8615 should be completed using the taxable income of the parent who has custody for the greater part of the year. If parents are married but living apart, and the custodial parent qualifies as unmarried under the Head of Household rules (Test 1, 1.12), the custodial parent’s taxable income is used on Form 8615. If the custodial parent is not considered unmarried, the income of the parent with the larger taxable income is used. If the custodial parent has remarried and files a joint return with a new spouse, their joint return taxable income is used on the child’s Form 8615. If the parents were never married but they live together with the child, the income of the parent with the larger taxable income is used; if the parents live apart, the income of the parent with custody for most of the year is used on Form 8615.

More than one child subject to kiddie tax.

You file a separate Form 8615 for each child and on each form net investment income of all the children subject to the tax is included. The computed tax is allocated to each of your children, according to his or her share of their combined net investment income. This computation is incorporated in the steps of Form 8615 and by following the order of the form, you will make the proper allocation.

Estimating the kiddie tax in case of filing delay.

If you are unable to file your 2012 return by April 15, 2013, the child’s tax on Form 8615 may be based on an estimate. You may make a reasonable estimate of your taxable income on Form 8615 or may estimate the net investment income of children under age 18 if that information is not yet available. When you have the complete income details, file an amended return for the child on Form 1040X.

Planning Reminder

Estimating Tax on Form 8615

If you are unable to file your 2012 return by April 15, 2013, but your child’s return is filed by the April 15 deadline, the child’s Form 8615 may be based on an estimate of your tax liability. When you have the completed income information, file an amended return. Instead of using estimates, you can file for a six-month filing extension.

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A reasonable estimate may be based on your 2011 taxable income and the 2011 investment income of the child. If a refund is due on the amended return, the IRS will pay interest from April 15, 2013, or, if the return was filed late, from the filing date. If additional tax is due on the amended return, interest will be charged from April 15, but no penalty will be imposed.

Instead of estimating the kiddie tax, you may file Form 4868 to get a six-month extension (46.3) for the child’s return on which the kiddie tax is included. However, interest will be charged on any tax due that was not paid by the original filing date, and late payment penalties may also apply (46.3).