Tax for Children Under Age 14
Who Have Investment Income of More Than $1,500

Part of a child's 2001 investment income may be subject to tax at the parent's tax rate if:

1. The child was under age 14 on January 1, 2002,
2. The child's investment income was more than $1,500, and
3. The child is required to file a return for 2001.

These conditions are also shown in Figure 32-B .

If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Attach the completed form to the child's Form 1040, Form 1040A, or Form 1040NR.

The following discussions explain the parental information needed for Form 8615 and the steps to follow in figuring the child's tax. Form 8615 is illustrated later.

Providing Parental Information (Form 8615, lines A-C)

On lines A and B of Form 8615, enter the parent's name and social security number. (If the parents filed a joint return, enter the name and social security number listed first on the joint return.) On line C, check the box for the parent's filing status.

See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615.

Parent with different tax year. If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year.

Parent's return information not known timely. If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates.

You can use any reasonable estimate. This includes using information from last year's return. If you use an estimated amount on Form 8615, write "Estimated" on the line next to the amount.

When you get the correct information, file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

Instead of using estimated information, you may want to request an extension of time to file. Extensions are discussed in chapter 1.

Step 1. Figuring the Child's Net Investment Income (Form 8615, Part I)

The first step in figuring a child's tax using Form 8615 is to figure the child's net investment income. To do that, use Part I of Form 8615.

Line 1 (investment income). If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Adjusted gross income is shown on line 33 of Form 1040, line 19 of Form 1040A, or line 33 of Form 1040NR. Form 1040EZ cannot be used if Form 8615 must be filed.

If the child had earned income, figure the amount to enter on line 1 of Form 8615 by using the worksheet in the instructions for the form.

However, if the child has excluded any foreign earned income or deducted either a loss from self-employment or a net operating loss from another year, use the Alternate Worksheet for Line 1 of Form 8615 in Publication 929 to figure the amount to enter on line 1 of Form 8615.

Investment income defined. Investment income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest, dividends, capital gains, the taxable part of social security and pension payments, and certain distributions from trusts. Investment income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).

Nontaxable income. For this purpose, investment income includes only amounts that the child must include in total income. Nontaxable investment income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included.

Income from property received as a gift. A child's investment income includes all income produced by property belonging to the child. This is true even if the property was transferred to the child regardless of when the property was transferred or purchased or who transferred it.

A child's investment income includes income produced by property given as a gift to the child. This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act.

Example. Amanda Black, age 13, received the following income.

• Dividends -- $600
• Wages -- $2,100
• Taxable interest -- $1,200
• Tax-exempt interest -- $100
• Net capital gains -- $100.

The dividends were on stock given to her by her grandparents.

Amanda's investment income is $1,900. This is the total of the dividends ($600), taxable interest ($1,200), and net capital gains ($100). Her wages are earned (not investment) income because they are pay received for work actually done. Her tax-exempt interest is not included because it is nontaxable.

Trust income. If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other investment income from the trust are investment income to the child.

Line 2 (deductions). If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $1,500 on line 2.

If the child does itemize deductions, enter on line 2 the larger of:

1. $750 plus the child's itemized deductions that are directly connected with the production of investment income, or
2. $1,500.

Directly connected. Itemized deductions are directly connected with the production of investment income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees.

These expenses are added to certain other miscellaneous deductions on Schedule A (Form 1040). Only the amount greater than 2% of the child's adjusted gross income can be deducted. See chapter 30 for more information.

Example 1. Roger, age 12, has investment income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with his investment income. His adjusted gross income is $8,000, which is entered on line 1. Line 2 is $1,500 because that is more than the sum of $750 and his directly-connected itemized deductions of $300.

Example 2. Eleanor, 8, has investment income of $16,000 and an early withdrawal penalty of $100. She has no other income. She has itemized deductions of $1,050 (net of the 2% of adjusted gross income limit) that are directly connected with the production of her investment income. Her adjusted gross income, entered on line 1, is $15,900 ($16,000 - $100). Line 2 is $1,800. This is the larger of:

1. $750 plus the $1,050 of directly connected itemized deductions, or
2. $1,500.

Step 2. Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II)

The tentative tax is the difference between the tax on the parent's taxable income figured with the child's net investment income (plus the net investment income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it.

When figuring the tentative tax, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net investment income. For example, do not refigure the medical expense deduction.

Figure the tentative tax on lines 6 through 13 of Form 8615.

Note. If the child has any capital gains or losses, get Publication 929 for help in completing Part II of Form 8615.

You may be able to skip lines 7 through 16 of Form 8615. See the Form 8615 instructions for line 6 for details.

Line 7 (net investment income of other children). If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Do not include the amount from line 5 of the Form 8615 being completed.

Example. Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. The children's net investment income amounts on line 5 of their Forms 8615 are:

• Sharon -- $800
• Jerry -- $600
• Mike -- $1,000

Line 7 of Sharon's Form 8615 will show $1,600 ($600 + $1,000), the total of the amounts on line 5 of Jerry's and Mike's Forms 8615.

Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000).

Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600).

Other children's information not available. If the net investment income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. See Parent's return information not known timely, earlier.

Line 11 (tentative tax). Subtract line 10 from line 9 and enter the result on this line. This is the tentative tax.

If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13.

Lines 12a and 12b (dividing the tentative tax). If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net investment income. This is done on lines 12a, 12b, and 13. Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Divide the amount on line 5 by the amount on line 12a and enter the result as a decimal on line 12b.

Example. In the earlier example under Line 7 (net investment income of other children), Sharon's Form 8615 shows $1,600 on line 7. Line 12a is $2,400, the total of lines 5 and 7 ($800 + $1,600). The decimal on line 12b is .333, figured as follows and rounded to three places.

Step 3. Figuring the Child's Tax (Form 8615, Part III)

The final step in figuring a child's tax using Form 8615 is to determine the larger of:

1. The total of:
1. The child's share of the tentative tax based on the parent's tax rate, plus
2. The tax on the child's taxable income in excess of net investment income, figured at the child's tax rate, or
2. The tax on the child's taxable income, figured at the child's tax rate.

This is the child's tax. It is figured on lines 14 through 18 of Form 8615.

Tax computation for certain dependents. Generally, if the child can be claimed as a dependent on someone else's tax return, you can reduce any tax amount figured using the 2001 Tax Table or Tax Rate Schedules (including any line 15 tax figured on any worksheet or schedule described in the following paragraphs) by one-third of the tax amount or $300, whichever is smaller.

Alternative minimum tax. A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax laws or certain adjustments to taxable income that total more than an exemption amount. See Alternative Minimum Tax in chapter 31.

AMT is figured on Form 6251. For information on special limits that apply to a child who files Form 6251, Alternative Minimum Tax--Individuals, see Alternative Minimum Tax in Publication 929.

Illustrated Example

The following example includes a completed Form 8615.

John and Laura Brown have one child, Sara. She is 13 and has $2,750 taxable interest and dividend income and $1,500 earned income. She does not itemize deductions and did not receive an advance payment of her 2001 taxes during 2001. John and Laura file a joint return with John's name and social security number listed first. They claim three exemptions, including an exemption for Sara, on their return.

Because Sara is under age 14 and has more than $1,500 investment income, part of her income may be subject to tax at her parents' rate. A completed Form 8615 must be attached to her return.

Sara's father, John, fills out Sara's return for her.

John enters his name and social security number on Sara's Form 8615 because his name and number are listed first on the joint return he and Laura are filing. He checks the box for married filing jointly.

He enters Sara's investment income, $2,750, on line 1. Sara does not itemize deductions, so John enters $1,500 on line 2. He enters $1,250 ($2,750 - $1,500) on line 3.

Sara's taxable income, as shown on line 25 of her Form 1040A, is $2,500. This is her total income ($4,250) minus her standard deduction ($1,750). Her standard deduction is limited to the amount of her earned income plus $250. John enters $2,500 on line 4.

John compares lines 3 and 4 and enters the smaller amount, $1,250, on line 5.

John enters $48,000 on line 6. This is the taxable income from line 39 of their joint Form 1040 return. Sara is an only child, so line 7 is blank. He adds line 5 ($1,250), line 6 ($48,000), and line 7 (blank), and enters $49,250 on line 8.

Using the column for married filing jointly in the Tax Table, John finds the tax on $49,250. He enters the tax, $7,901 on line 9. He enters $7,557 on line 10. This is the tax from line 40 of John and Laura's Form 1040. He enters $344 on line 11 ($7,901 - $7,557).

Because line 7 is blank, John skips lines 12a and 12b and enters $344 on line 13.

John subtracts line 5 ($1,250) from line 4 ($2,500) and enters the result, $1,250, on line 14. Using the column for single filing status in the Tax Table, John finds the tax on $1,250 and reduces it as explained earlier. He enters this tax, $126, on line 15. He adds lines 13 ($344) and 15 ($126) and enters $470 on line 16.

Using the column for single filing status in the Tax Table, John finds the tax on $2,500 ( line 4) and reduces it as explained earlier. He enters this tax, $251, on line 17.

John compares lines 16 and 17 and enters the larger amount, $470, on line 18 of Sara's Form 8615. He also enters that amount on line 26 of Sara's Form 1040A.

John also completes Schedule 1 (Form 1040A) for Sara.

Form 8615

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