Parent's Election To Report Child's Interest and Dividends

You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. If you do, your child will not have to file a return.

You can make this election for 2002 only if all the following conditions are met.

1. Your child was under age 14 at the end of 2002. A child born on January 1, 1989, is considered to be age 14 at the end of 2002.
2. Your child is required to file a return for 2002 unless you make this election.
3. Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).
4. The dividend and interest income was less than $7,500.
5. No estimated tax payments were made for 2002 and no 2001 overpayment was applied to 2002 under your child's name and social security number.
6. No federal income tax was taken out of your child's income under the backup withholding rules.
7. You are the parent whose return must be used when applying the special tax rules for children under 14. (See Which Parent's Return To Use, earlier.)

These conditions are also shown in Figure 1.

How to make the election.   Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. (If you make this election, you cannot file Form 1040A or Form 1040EZ.) Attach a separate Form 8814 for each child for whom you make the election. You can make the election for one or more children and not for others.

Effect of Making the Election

The federal income tax on your child's income may be more if you make the Form 8814 election.

Rate may be higher.   If you use Form 8814, the child's income may be taxed at a higher rate on your return than it would be on the child's own return.

Deductions you cannot take.   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return.

1. The higher standard deduction for a blind child.
2. The deduction for a penalty on an early withdrawal of your child's savings.
3. Itemized deductions (such as your child's investment expenses or charitable contributions).

Deductible investment interest.   If you use Form 8814, your child's investment income is considered your investment income. To figure the limit on your deductible investment interest, add the child's investment income to yours. However, if your child received capital gain distributions or Alaska Permanent Fund dividends, see chapter 3 of Publication 550, Investment Income and Expenses, for information about how to figure the limit.

Alternative minimum tax.   If your child received tax-exempt interest from a private activity bond, you must determine if that interest is a tax preference item for alternative minimum tax (AMT) purposes. If it is, you must include it with your own tax preference items when figuring your AMT. For more information, get the instructions for Form 6251, Alternative Minimum Tax - Individuals.

Reduced deductions or credits.   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following.

1. Deduction for contributions to a traditional individual retirement arrangement (IRA).
2. Deduction for student loan interest.
3. Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses.
4. Total itemized deductions.
5. Personal exemptions.
6. Credit for child and dependent care expenses.
7. Child tax credit.
8. Education tax credits.
9. Earned income credit.

Penalty for underpayment of estimated tax.   If you make this election for 2002 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. If you plan to make this election for 2003, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Get Publication 505 for more information.

Figuring Child's Income

Use Part I of Form 8814 to figure your child's interest and dividend income to report on your return. Only the amount over $1,500 is added to your income. This amount is shown on line 6 of Form 8814. Include this amount on line 21 of Form 1040 or Form 1040NR. In the space next to line 21, write Form 8814. If you file more than one Form 8814, include the total amounts from line 6 of all your Forms 8814 on line 21.

Capital gain distributions.   Enter on line 3 of Form 8814 any capital gain distributions your child received. The amount of these distributions that is added to your income must be reported on line 13 of Schedule D (Form 1040) or, if you are not required to file Schedule D, on line 13 of Form 1040. You do not include it on line 6 of Form 8814 or on line 21 of Form 1040.

Use the worksheet at the top of the next column to figure the amount to report as capital gain distributions on Schedule D, or directly on Form 1040, and the amount to report on Form 8814, line 6. (The worksheet is needed to divide the $1,500 base amount on line 5 of Form 8814 between the child's capital gain distributions and other interest and dividend income.)

Worksheet for Child's Capital Gain Distributions
(Keep for your records)
1.	Enter amount from Form 8814, line 3
2.	Enter amount from Form 8814, line 4
3.	Divide line 1 by line 2. Enter the result as a decimal
4.	Base amount		$ 1,500
5.	Subtract line 4 from line 2
6.	Multiply line 5 by the decimal on line 3. Enter the result here and on Schedule D, line 13, column (f), or on line 13 of Form 1040
7.	Subtract line 6 from line 5. Enter the result here and on Form 8814, line 6

On the dotted line next to line 6, Form 8814, write CGD and the amount from line 6 of this worksheet. On the dotted line next to line 13, Schedule D, or line 13, Form 1040, write Form 8814 and the amount from line 6 of this worksheet.

28% rate gain.   If any of the child's capital gain distributions are reported on Form 1099-DIV as 28% rate gain, you must determine how much to also include on Schedule D, line 13, column (g). Multiply the child's capital gain distribution included on line 13, column (f), by a fraction. The numerator is the part of the child's total capital gain distribution that is 28% rate gain. The denominator is the child's total capital gain distribution.

Qualified 5-year gain.   If any of the child's capital gain distributions are reported on Form 1099-DIV as qualified 5-year gain, you must determine how much to also include on line 5 of the Qualified 5-Year Gain Worksheet in the instructions for line 29 of Schedule D. Multiply the child's capital gain distribution included on line 13, column (f), by a fraction. The numerator is the part of the child's total capital gain distribution that is qualified 5-year gain. The denominator is the child's total capital gain distribution.

Unrecaptured section 1250 gain.   If any of the child's capital gain distributions are reported on Form 1099-DIV as unrecaptured section 1250 gain, you must determine how much to include on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for line 19 of Schedule D. Multiply the child's capital gain distribution included on line 13, column (f), by a fraction. The numerator is the part of the child's total capital gain distribution that is unrecaptured section 1250 gain. The denominator is the child's total capital gain distribution.

Figure 1. Can You Include Your Child's Income On Your Tax Return?

Section 1202 gain.   If any of the child's capital gain distributions are reported as section 1202 gain (gain on qualified small business stock) on Form 1099-DIV, part or all of that gain may be eligible for the section 1202 exclusion. (For information about the exclusion, see chapter 4 of Publication 550.) To figure that part, multiply the child's capital gain distribution included on line 13, column (f), by a fraction. The numerator is the part of the child's total capital gain distribution that is section 1202 gain. The denominator is the child's total capital gain distribution. Your section 1202 exclusion is generally 50% of the result, but may be subject to a limit. See the instructions for Schedule D for information on how to report the exclusion amount.

Example.   Fred is 6 years old. In 2002, he received dividend income of $1,600, which included $1,280 of ordinary dividends and a $320 capital gain distribution from a mutual fund. (None of the distributions were reported on Form 1099-DIV as 28% gain, qualified 5-year gain, unrecaptured section 1250 gain, or section 1202 gain.) He has no other income and is not subject to backup withholding. No estimated tax payments were made under his name and social security number.

Fred's parents elect to include Fred's income on their tax return instead of filing a return for him. They enter $1,280 on line 2 and $320 on line 3, Form 8814.

$100 of Fred's income must be included as income on his parents' tax return ($1,600 gross income minus $1,500). They figure the amount to report on line 13 of their Schedule D and the amount to report on line 6, Form 8814, as follows.

Worksheet for Child's Capital Gain Distributions
(Keep for your records)
1.	Enter amount from Form 8814, line 3		$   320
2.	Enter amount from Form 8814, line 4		1,600
3.	Divide line 1 by line 2. Enter the result as a decimal		.20
4.	Base amount		$ 1,500
5.	Subtract line 4 from line 2		100
6.	Multiply line 5 by the decimal on line 3. Enter the result here and on Schedule D, line 13, column (f), or on line 13 of Form 1040		20
7.	Subtract line 6 from line 5. Enter the result here and on Form 8814, line 6		$    80

line 21 of their Form 1040 and write Form 8814-$80 on the dotted line next to the total.

On Schedule D, they include $20 on line 13, column (f), and write Form 8814-$20 on the dotted line next to this line.

Figuring Additional Tax

Use Part II of Form 8814 to figure the tax on the $1,500 of your child's interest and dividends that you do not include in your income. This tax is added to the tax figured on your income.

This additional tax is the smaller of:

1. 10% × (your child's gross income - $750), or
2. $75.

Include the amount from line 9 of all your Forms 8814 in the total on line 42, Form 1040, or line 40, Form 1040NR. Check box a on Form 1040, line 42, or Form 1040NR, line 40.

Illustrated Example

David and Linda Parks are married and will file separate tax returns for 2002. Their only child, Philip, is 8. Philip received a Form 1099-INT showing $3,200 taxable interest income and a Form 1099-DIV showing $300 ordinary dividends. His parents decide to include that income on one of their returns so they will not have to file a return for Philip.

First, David and Linda each figure their taxable income (Form 1040, line 41) without regard to Philip's income. David's taxable income is $41,700 and Linda's is $59,300. Because her taxable income is greater, Linda can elect to include Philip's income on her return. (See Which Parent's Return To Use, earlier.)

On Form 8814 (illustrated on the next page), Linda enters her name and social security number, then Philip's name and social security number. She enters Philip's taxable interest income, $3,200, on line 1a. Philip had no tax-exempt interest income, so she leaves line 1b blank. Linda enters Philip's ordinary dividends, $300, on line 2. Philip did not have any capital gain distributions, so she leaves line 3 blank.

Linda adds lines 1a and 2 and enters the result, $3,500, on line 4. From that amount she subtracts the $1,500 base amount shown on line 5 and enters the result, $2,000, on line 6. This is the part of Philip's income that Linda must add to her income.

Figure 2. Do You Have To Use Form 8615 To Figure Your Child's Tax?

Linda includes the $2,000 in the total on line 21 of her Form 1040 (not illustrated) and in the space next to that line writes Form 8814-$2,000. Adding that amount to her income increases each of the amounts on lines 22, 35, 36, 39, and 41 of her Form 1040 by $2,000. Linda is not claiming any deductions or credits that are affected by the increase to her income. Therefore, her revised taxable income on line 41 is $61,300 ($59,300 + $2,000).

On Form 8814, Linda subtracts the $750 shown on line 7 from the $3,500 on line 4 and enters the result, $2,750, on line 8. Because that amount is not less than $750, she enters $75 on line 9. This is the tax on the first $1,500 of Philip's income, which Linda did not have to add to her income. She must add this additional tax to the tax figured on her revised taxable income.

The tax on her $61,300 revised taxable income is $13,603. She adds $75, and enters the $13,678 total on line 42 of Form 1040, and checks box a.

Linda attaches Form 8814 to her Form 1040.

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

Part of a child's 2002 investment income may be subject to tax at the parent's tax rate if:

1. The child was under age 14 at the end of 2002 (A child born on January 1, 1989, is considered to be age 14 at the end of 2002.),
2. The child's investment income was more than $1,500, and
3. The child is required to file a tax return for 2002.

These conditions are also shown in Figure 2 below.

If neither parent was alive on December 31, 2002, do not use Form 8615. Instead, figure the child's tax in the normal manner.

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.

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, earlier, for a discussion of 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.

Example.   Kimberly must use her mother's tax and taxable income to complete her Form 8615 for calendar year 2002 (January 1 - December 31). Kimberly's mother files her tax return on a fiscal year basis (July 1 - June 30). Kimberly must use the information on her mother's return for the tax year ending June 30, 2002, to complete her 2002 Form 8615.

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.

Filled-in Form 8814 for Linda Parks Form: 8814

Extension of time to file.   Instead of using estimates, you can get an automatic 4-month extension of time to file if, by April 15, 2003, you file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. You can file a paper Form 4868 or you can file it electronically. See the instructions for Form 4868 for details.

If you have an extension, you must file the child's return by August 15, 2003, unless you ask for and are granted an additional extension.

An extension of time to file is not an extension of time to pay. You must make an accurate estimate of the tax for 2002. If you do not pay the full amount due by the regular due date, the child will owe interest and may also be charged penalties. See Form 4868 and its instructions.

Parent's return information not available.   If a child cannot get the required information about his or her parent's tax return, the child (or the child's legal representative) can request the necessary information from the Internal Revenue Service (IRS).

How to request.   After the end of the tax year, send a signed, written request for the information to the Internal Revenue Service Center where the parent's return will be filed. (The IRS cannot process a request received before the end of the tax year.)

You should also consider getting an extension of time to file the child's return, because there may be a delay in getting the requested information.

The request must contain all of the following.

1. A statement that you are making the request to comply with section 1(g) of the Internal Revenue Code and that you have tried to get the information from the parent.
2. Proof the child is under 14 years of age (for example, a copy of the child's birth certificate).
3. Evidence the child has more than $1,500 of unearned income (for example, a copy of the child's prior year tax return or copies of Forms 1099 for the current year).
4. The name, address, social security number (if known), and filing status (if known) of the parent whose information is to be shown on Form 8615.

A child's legal representative making the request should include a copy of his or her Power of Attorney, such as Form 2848, or proof of legal guardianship.

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