Doing your own taxes can get confusing and complicated, depending on your situation. Now, imagine filing for yourself and the unearned income of your child or children. Yes, you may have a filing requirement for unearned income even though it's under your child. If you have assets in a custodial account, then this might apply to you.

It's called the "kiddie tax" and can be difficult to report depending on the nature of unearned income, the amount, and other factors. The kiddie tax was passed to stop wealthy individuals from transferring their wealth to their children in order to take advantage of their lower tax rates. The kiddie tax has several components, so it's best to break it down into parts.

1. Kiddie tax requirements and form 8615

If unearned income for your child is more than $2,200, then your child may be subject to the kiddie tax. If a parent’s tax rate is higher than the child’s, the child’s unearned income in excess of $2,200 is taxed at the parent's tax rate. It’s important to note that if children have unearned income in excess of $1,100, they may have to file their own tax return. Your child may have to file form 8615 if their unearned income meets the following conditions:

• Unearned income is over $2,200
• Your child meets one of several age requirements- more on this later
• Your child has at least one parent that's alive at the end of the tax year
• Your child is required to file a tax return
• Your child does not file a joint return for that tax year

Who is subject to kiddie tax? The age requirements can be tricky here. Typically, in order to be subject to the kiddie tax, your child has to be under 18 at the end of the tax year or was 18 and didn't have earned income that was more than half of their support. The other age requirement for kiddie tax is if your child is a full-time student between the ages of 19-23 at the end of the tax year and their earned income was not more than half of their support.

Now, if that wasn't confusing, your child might also be subject to a Net Investment Income Tax (NIIT) if they have to file form 8615. The NIIT is an additional 3.8% tax calculated on form 8960. Nuances such as this highlight the need to work with a reliable tax professional.

2. Form 8814 option

The kiddie tax has two common filing options: form 8615, as mentioned before, and Form 8814. It's an option for parents who want to declare their child's investment income. If you decide to take this route, your child won't have to file a tax return. Here are some of the requirements for this option:

• Your child's gross income was less than $11,000
• Your child was under age 19 (or under 24 if a full-time student)
• Your child’s only income was from interest, dividends, and capital gain distributions
• No federal taxes were withheld from your child's income
• No estimated payments were made
• You're the parent qualified to make the election

Although the requirements for form 8814 are similar to 8615, it's important not to confuse the two and consult a tax professional.

3. Changes to the kiddie tax

Changes to tax law happen all the time. For 2020 and beyond, kiddie tax rules are in a pre-TCJA setting. This means that kids who have to report unearned income are taxed at their parents' marginal tax rates. For a parent, this means that tax season just got more complicated. Rapid changes, and in this case, the revival of old rules, can put many people on their toes.

4. Let Lutz make your kiddie tax filing a breeze

Filing your own taxes can get complicated, depending on your situation. The kiddie tax only adds to this burden. Lutz has helped people with tax preparation for over 40 years. If your child has unearned income and you need to file under the kiddie tax, contact us for assistance. You can also learn more about our tax services or read related articles on our accounting blog.