Part 2. Tax on Investment Income of Child Under 14

Words you may need to know (see Glossary):

• Adjusted gross income
• Adjustments to income
• Alternative minimum tax
• Capital gain distribution
• Dependent
• Earned income
• Filing status
• Gross income
• Investment income
• Itemized deductions
• Net capital gain
• Net investment income
• Standard deduction
• Tax year
• Taxable income
• Unearned income

Two special rules apply to the tax on certain investment income of a child under age 14.

1. If the child's interest, dividends, and other investment income total more than $1,500, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. (See Tax for Children Under Age 14 Who Have Investment Income of More Than $1,500, later.)
2. The child's parent may be able to choose to include the child's interest and dividend income (including capital gain distributions) on the parent's return rather than file a return for the child. (See Parent's Election To Report Child's Interest and Dividends, later.)

For these rules, the term "child" includes a legally adopted child and a stepchild. These rules apply whether or not the child is a dependent.

These rules do not apply if:

1. The child is not required to file a tax return (see Filing Requirements in Part 1), or
2. Neither of the child's parents were living at the end of the tax year.

Which Parent's Return To Use

If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the investment income of a child under 14. For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends. The tax rate and other return information from that parent's return are used to compute the child's tax as explained later under Tax for Children Under Age 14 Who Have Investment Income of More Than $1,500.

Parents are married. If the child's parents file separate returns, use the return of the parent with the greater taxable income.

Parents not living together. If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income.

For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in Publication 501.

Parents are divorced. If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent.

Custodial parent remarried. If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Do not use the return of the noncustodial parent.

If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies.

Parents never married. If a child's parents did not marry each other, but lived together all year, use the return of the parent with the greater taxable income. If the parents did not live together all year, the rules explained earlier under Parents are divorced apply.

Widowed parent remarried. If a widow or widower remarries, the new spouse is treated as the child's other parent. The rules explained earlier under Custodial parent remarried apply.

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