subject: Tax On Investment Income Of Children [print this page] The Internal Revenue Service imposes special tax consequences on investment income of dependent children. Parents who establish accounts for their children should be aware of the tax obligations related to receiving income from assets held in a child's name.
This is a specific area of tax knowledge covered in an enrolled agent course. Individuals with EA certification therefore have the particular competence necessary for helping sort out the details in situations involving a child's investment income.
The IRS requires taxpayers to comply with a standard of not seeking lower tax by simply holding accounts in the names of children. Enrolled agent ethics involves understanding such actions and assuring that taxpayers don't evade tax compliance related to investment income of their children.
The IRS defines investment income as its categories of "unearned income", which includes interest, dividends, and capital gains. The key factors involving investment income of children are the tax rate that applies and how to report the income.
Special tax rules apply to a child with investment income exceeding a threshold established by the IRS. That threshold in 2010 is $1,900 of annual investment income. In addition, the special provisions of the tax code related to investment income apply only to children who are either under age 18, exactly age 18 but lacking earned income providing at least half of self-support, or full-time students between 19 and 24 with earned income that doesn't exceed half of self-support.
Children with an age and amount of investment income that fall within the special IRS rules are subject to tax at the parents' rate. The investment income is treated as additional income of the parents and therefore taxed at their marginal tax rate.
Reporting the child's investment income and applying the parents' tax rate involves a process addressed in tax courses, such as those constituting enrolled agent CE. A child might file a tax return due to income other than from investments. In that case Form 8615 is included in the child's return to report the investment income and apply the parents' tax rate. Under most circumstances the child is not required to file a tax return. In these situations, the parents include Form 8814 with their tax return to report the investment income earned in the child's name. Attaching this form to the parents' tax return causes a tax assessment on the parents for the investment income.
Continuing education enrolled agents complete annually reinforces knowledge about unusual tax matters. One such situation involves the rules relating to a child's investment income. Therefore, continuing education tax courses include topics that commonly require taxpayers to seek the help of enrolled agents. A frequent misunderstanding of taxpayers is determining whether investment income is taxed at the parents' rate or the child's rate.
The Internal Revenue Service imposes special tax consequences on investment income of dependent children. Parents who establish accounts for their children should be aware of the tax obligations related to receiving income from assets held in a child's name.
This is a specific area of tax knowledge covered in an enrolled agent course. Individuals with EA certification therefore have the particular competence necessary for helping sort out the details in situations involving a child's investment income.
The IRS requires taxpayers to comply with a standard of not seeking lower tax by simply holding accounts in the names of children. Enrolled agent ethics involves understanding such actions and assuring that taxpayers don't evade tax compliance related to investment income of their children.
The IRS defines investment income as its categories of "unearned income", which includes interest, dividends, and capital gains. The key factors involving investment income of children are the tax rate that applies and how to report the income.
Special tax rules apply to a child with investment income exceeding a threshold established by the IRS. That threshold in 2010 is $1,900 of annual investment income. In addition, the special provisions of the tax code related to investment income apply only to children who are either under age 18, exactly age 18 but lacking earned income providing at least half of self-support, or full-time students between 19 and 24 with earned income that doesn't exceed half of self-support.
Children with an age and amount of investment income that fall within the special IRS rules are subject to tax at the parents' rate. The investment income is treated as additional income of the parents and therefore taxed at their marginal tax rate.
Reporting the child's investment income and applying the parents' tax rate involves a process addressed in tax courses, such as those constituting enrolled agent CE. A child might file a tax return due to income other than from investments. In that case Form 8615 is included in the child's return to report the investment income and apply the parents' tax rate. Under most circumstances the child is not required to file a tax return. In these situations, the parents include Form 8814 with their tax return to report the investment income earned in the child's name. Attaching this form to the parents' tax return causes a tax assessment on the parents for the investment income.
Continuing education enrolled agents complete annually reinforces knowledge about unusual tax matters. One such situation involves the rules relating to a child's investment income. Therefore, continuing education tax courses include topics that commonly require taxpayers to seek the help of enrolled agents. A frequent misunderstanding of taxpayers is determining whether investment income is taxed at the parents' rate or the child's rate.
by: Sawyer Adams
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