Reporting a Child's Income on Your Tax Return

If all of your child's income was in the form of interest, dividends, and capital gain distributions (e.g., from mutual funds), and the amount is more than $800 but less than $8,000, you can elect to report the income on your own return rather than filing a separate return for the child.

The IRS allows you to treat your child's income as your own, ostensibly to save you time. For a child under 14, all unearned income above $1,600 (2005) must be taxed at the parent's rate, and including the income on your return forces you to calculate this amount.

However, the time you could actually save is minimal at best. If you decide to go this route, you must also complete a Form 8814, Parents' Election to Report Child's Interest and Dividends, for each child and attach it to your tax return.

Save Money Even more important than the time element is the fact that you're likely to pay more tax if you report your child's income on your own return. This is primarily because you will have to include your child's income in arriving at your own adjusted gross income (AGI), and having a higher AGI can cause you to lose or reduce numerous tax breaks including deductible contributions to an IRA; itemized deductions for medical expenses, casualty and theft losses, and miscellaneous deductions; your credit for child and dependent care; the per-child tax credit; the Hope Scholarship credit; the lifetime learning credit; and the deduction for interest on education loans. Moreover, you could also increase the amount of personal exemptions and itemized deductions you'd lose under the phaseout for higher income taxpayers. Furthermore, the additional tax you owe on April 15th because of your child's income can cause you to pay penalties, if you don't increase your withholding or make estimated tax payments to cover it.

If you do decide to report your child's income on your own tax return, and you are married filing separately, the parent with higher income must report all of the children's income on his or her own return. Similarly, if the parents live together but are not married, the higher-income parent must report.

If the parents are divorced or legally separated, the parent with custody for the greater part of the year should include the child's income. If the custodial parent has remarried and is filing separately with a stepparent, the stepparent should include the child's income if the stepparent's income is higher than the custodial parent's.

Planning Tools You can download Form 8814 to aid in your financial planning.

You cannot report the child's income on your own return if any tax was withheld from the child's income, or if he or she made estimated tax payments during the year. In that case, the child would have to file his or her own return.

If you report the child's income, you can't claim any deductions for the child, such as a higher standard deduction if the child was blind, the deduction for a penalty on early withdrawal of savings, or any itemized deductions such as investment expenses or charitable contributions.

Save Money If your child had any capital gain distributions from mutual funds, make sure that you include these on your Schedule D, rather than reporting them with the rest of the child's income on Line 6 of your Form 8814. Otherwise, your child won't get the benefit of the lower tax rate on capital gains.