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

Use Part I of Form 8814 to figure your child's interest and dividend income to report on your return. Only the amount over $1,600 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. If you file more than one Form 8814, include the total amounts from line 6 of all your Forms 8814 on line 21. In the space next to line 21, enter “Form 8814” and the total of the line 6 amounts.

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 Schedule D, line 13, 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.

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

Use Form 8814, Part II, to figure the tax on the $1,600 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:

David and Linda Parks are married and will file separate tax returns for 2004. Their only child, Philip, is 8. Philip received a Form 1099-INT showing $3,240 taxable interest income and a Form 1099-DIV showing $360 ordinary dividends. All the dividends were qualified 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 42) 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, $3,240, on line 1a. Philip had no tax-exempt interest income, so she leaves line 1b blank. Linda enters Philip's ordinary dividends, $360, 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, $3,600, on line 4. Because Philip had qualified dividends, Linda must use the Child's Qualified Dividends and Capital Gain Distributions Worksheet to figure the amount to enter on line 6, instead of subtracting line 5 from line 4. The amount she enters on line 6 is $1,800, the amount from line 11 of the worksheet. On the dotted line next to line 6, she enters “QD–$200,” the amount from line 8 of the worksheet. She includes that amount ($200) on lines 9a and 9b of her Form 1040. On the dotted line next to lines 9a and 9b, she enters “Form 8814–$200.”

Linda includes $1,800 in the total on line 21 of her Form 1040 (not illustrated) and in the space next to that line writes “Form 8814–$1,800.” Adding that amount, plus the $200 of qualified dividends, to her income increases each of the amounts on lines 22, 36, 37, 40, and 42 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 42 is $61,300 ($59,300 + $200 + $1,800).

On Form 8814, Linda subtracts the $800 shown on line 7 from the $3,600 on line 4 and enters the result, $2,800, on line 8. Because that amount is not less than $800, she enters $80 on line 9. This is the tax on the first $1,600 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 $12,150. She adds $80, and enters the $12,230 total on Form 1040, line 43, and checks box a.

Linda attaches Form 8814 to her Form 1040.

On Form 8615, lines A and B, 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.

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, 2005, 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, 2005, 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 2004. 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.

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 $1,600 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.

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 Form 8615, Part I. For an example, see the Illustrated Part I of Form 8615 on the next page.

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 37 of Form 1040; line 22 of Form 1040A; or line 35 of Form 1040NR. Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615 must be filed.

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

However, use the following worksheet if the child has excluded any foreign earned income or deducted a loss from self-employment or a net operating loss from another year.

Alternate Worksheet
for Line 1 of Form 8615
A.	Enter the amount from the child's Form 1040, line 22, or Form 1040NR, line 23
B.	Enter the total of any net loss from self-employment, any net operating loss deduction, any foreign earned income exclusion, and any foreign housing exclusion from the child's Form 1040 or Form 1040NR. Enter this total as a positive number (greater than zero)
C.	Add line A and line B and enter the total.
D.	Enter the child's earned income plus any amount from line 33 of the child's Form 1040 or line 31 of the child's Form 1040NR.
	Generally, the child's earned income is the total of the amounts reported on Form 1040, lines 7, 12, and 18 (if line 12 or 18 is a loss, use zero) or Form 1040NR, lines 8, 13, and 19 (if line 13 or 19 is a loss, use zero)
E.	Subtract line D from line C. Enter the result here and on Form 8615, line 1

Illustrated Part I 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 (including capital gain distributions), 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 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.

Capital loss.   A child's capital losses are taken into account in figuring the child's investment income. Capital losses are first applied against capital gains. If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other investment income. Any difference over $3,000 is carried to the next year.

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

• Capital gains—$300

• Capital losses—($200)

The dividends were qualified dividends 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 capital gains reduced by capital losses ($300 - $200 = $100). Her wages are earned (not investment) income because they are 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.

Adjustment to income.   In figuring the amount to enter on line 1, the child's investment income is reduced by any penalty on the early withdrawal of savings.

The next step in completing Form 8615 is to figure a tentative tax on the child's net investment income at the parent's tax rate. The tentative tax at the parent's tax rate 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 at the parent's tax rate, 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. For an example, see the Illustrated Part II of Form 8615.

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. The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). The decimal on line 12b is .333, figured as follows and rounded to three places.

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

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

A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. These items include accelerated depreciation and certain tax-exempt interest income. The AMT may also apply if the child has passive activity losses or certain distributions from estates or trusts.

For more information on who is liable for AMT and how to figure it, get Form 6251.

This example shows how to fill out Forms 8615 and 1040A for Sara Brown. It also shows how to use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A instructions to figure Sara's tax.

John and Laura Brown have one child, Sara. She is 13 and has $1,050 taxable interest, $1,050 qualified dividend income, $700 capital gain distributions, and $1,550 earned income. She does not itemize deductions. 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 she is under age 14 and has more than $1,600 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. He completes her Form 1040A through line 27, then begins completing her Form 8615.

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, $2,800, on line 1. Sara does not itemize deductions, so John enters $1,600 on line 2. He enters $1,200 ($2,800 - $1,600) on line 3.

Sara's taxable income, as shown on line 27 of her Form 1040A, is $2,550. This is her total income ($4,350) minus her standard deduction ($1,800). Her standard deduction is limited to the amount of her earned income plus $250. John enters $2,550 on line 4.

John compares lines 3 and 4 and enters the smaller amount, $1,200, on line 5.

John enters $48,000 on line 6. This is the taxable income from line 42 of John and Laura's joint Form 1040 return. Sara is an only child, so line 7 is blank. He adds line 5 ($1,200), line 6 ($48,000), and line 7 (blank) and enters $49,200 on line 8.

Because Sara's capital gain distributions and qualified dividends are included on line 5, John uses Line 5 Worksheet #1 (in the instructions for Form 8615) to figure out that $300 net capital gain and $450 qualified dividends are included on line 5. He completes that worksheet as follows.

Therefore, line 8 of Sara's Form 8615 also includes net capital gain of $300 and qualified dividends of $450. John uses the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040A instructions) and follows the instructions under Using the Qualified Dividends and Capital Gain Tax Worksheet for line 9 tax in the Form 8615 instructions to figure the tax to enter on line 9 of Sara's Form 8615.

John enters $450 on line 2 of the Qualified Dividends and Capital Gain Tax Worksheet, and $300 on line 3 of that worksheet. That completed worksheet is shown later as Filled-in Qualified Dividends and Capital Gain Tax Worksheet #1. John enters the tax of $6,594 on line 9 of Sara's Form 8615.

He enters the tax from his and Laura's Form 1040 ($6,489) on line 10 of Sara's Form 8615, subtracts that amount from the $6,594 on line 9, and enters the $105 remainder on line 11. Because line 7 is blank, John skips lines 12a and 12b and enters $105 on line 13.

John subtracts line 5 ($1,200) from line 4 ($2,550) and enters the result, $1,350 on line 14. Using the instructions for line 14 earlier, John subtracts the net capital gain included on line 5 ($300) from Sara's net capital gain ($700) to figure the $400 net capital gain included on line 14. He also subtracts the qualified dividends included on line 5 ($450) from Sara's qualified dividends ($1,050) to figure the $600 qualified dividends included on line 14. He uses another Qualified Dividends and Capital Gain Tax Worksheet and follows the instructions under Using the Qualified Dividends and Capital Gain Tax Worksheet for line 15 tax, in the Form 8615 instructions, to figure the $86 tax to enter on Form 8615, line 15. He completes that worksheet as shown on Filled-in Qualified Dividends and Capital Gain Tax Worksheet #2.

John adds lines 13 and 15 of Form 8615 and enters the sum, $191, on line 16. Then he uses another Qualified Dividends and Capital Gain Tax Worksheet to figure the $169 tax on Sara's $2,550 taxable income to enter on Form 8615, line 17. He completes that worksheet as shown on Filled-in Qualified Dividends and Capital Gain Tax Worksheet #3.

Finally, John compares lines 16 and 17 and enters the larger amount, $191, on line 18 of Sara's Form 8615. He also enters that amount on line 28 of Sara's Form 1040A.

John also completes Schedule 1, Form 1040A (not shown) for Sara.