Typically, children are in a lower tax bracket than their parents and the reason for this is quite simple: most children don't have that much income, and those that do, rarely earn more than their parents. Some parents have attempted to take advantage of this by putting investments in their children's names, hoping that any investment profits would be taxed at the child's lower rate. In response, the federal government changed the tax treatment of children's unearned income by taxing it at the parent's tax rate. Form 8615 is used to make the child's tax calculations for this income.
Unearned income
"Unearned income" is income gained from a source other than employment, work, or other business activity. Money from work, by contrast, is "earned income." Unearned income includes all forms of investment income, including interest, dividends, most rent and royalty income. It also includes capital gains—the profit you make when you sell something for more than what you paid for it.
Who's required to file Form 8615?
For 2023, Form 8615 needs to be filed if all of the following conditions apply:
- The child has more than $2,500 in unearned income
- The child is required to file a tax return
- The child does not file a joint tax return with a spouse
- At least one of the child's parents is alive
- The child is within certain age limits
For tax purposes, the child's "age" is the age on December 31. The child is required to file the form if any of these conditions apply:
- The child is under 18 at the end of the year
- The child is 18 years old and does not have earned income that is more than half of the child's support for the year, or
- The child is a full-time student aged 19-23 and does not have earned income that is more than half of the child's support
Treatment of unearned income
In general, in 2023 the first $1,250 worth of a child's unearned income is tax-free. The next $1,250 is taxed at the child's income tax rate for 2023. Any unearned income above $2,500, however, is taxed at the marginal tax rate of the parent(s), that is usually higher than the child's rate. This tax treatment has gained a nickname: the "kiddie tax." Calculating how much tax applies to the child's income is the purpose of Form 8615.
For 2024, these amounts are increased such that the first $1,300 of a child's unearned income is tax-free, the next $1,300 is taxed at the child's tax rate and amounts over $2,600 are taxed at the parent's tax rate.
Information on the form
When filing the form, you'll need to provide the child's name and Social Security Number (SSN) and the name and Social Security Number of a parent, as well as which filing status the parent is using, such as single, joint or married filing separately. The form has three parts:
- Part I identifies the child's net unearned income and how much of it is subject to the kiddie tax
- Part II calculates the kiddie tax based on the parent's tax rate
- Part III calculates the child's tax that is used on the child's Form 1040
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