Picture this: It’s a sunny Saturday afternoon. Your children are engrossed in their favorite hobbies, their youthful passions taking center stage.
One child is meticulously constructing an architectural marvel from a pile of Lego bricks. Your youngest is sitting in the corner, crayons in hand, passionately crafting her next colorful creation on paper.
Meanwhile, the oldest is at the computer, managing a budding stock portfolio with a focused gaze. Despite their young age, they have embarked on the journey of investment and earning income.
However, as we all know, with income comes taxes, even for the youngest members of our family. That’s where Form 8814 enters the picture.
- Parents use Form 8814 to report a child’s income on their tax return, simplifying the tax filing process. However, it’s only applicable to certain types of unearned income.
- The Kiddie Tax should be included in 2 forms (Form 8814 and Form 8615). It applies to children with over $2,300 unearned income and can significantly impact a parent’s tax return. Understanding its rules is critical for accurate tax filing.
What Is Form 8814?
Form 8814 (Parent’s Election to Report Child’s Interest and Dividends Earning) is a document designed to handle a specific taxation circumstance related to children’s unearned income.
Unearned income refers to money received not from a job or self-employment but from other sources like dividends, taxable interest, capital gains, rents, royalties, pension and annuity income, taxable scholarship and fellowship grants, etc.
Parents typically use this form to include their child’s income on their federal income tax return. Form 8814 can simplify the filing process, possibly leading to a slightly higher tax liability. The $1,150 and below amounts are not taxed when using this election.
This form aims to streamline tax procedures for parents and their children. For many parents, dealing with their child’s income tax nuances can seem daunting.
The IRS, recognizing this, designed Form 8814 to minimize some administrative burdens, helping parents easily include their child’s income in their return.
However, it’s important to remember that not all children’s income is eligible for this treatment.
Only certain types of income, specifically interest, dividends, including capital gain distributions, and Alaska Permanent Fund dividends, can be reported on this form. Other types of income, such as earned income from a job, cannot be included using Form 8814.
Alongside these guidelines, it’s also relevant to note that no estimated tax payment has been made for the child during the current year. This includes any potential overpayment of tax from the previous year’s return that might be applied to the current year’s estimated tax.
Understanding Kiddie Tax
The term “Kiddie Tax” might sound playful, but it’s a crucial component of the tax landscape for minors with unearned income.
This tax was introduced to prevent parents from shifting income to their children to benefit from lower tax rates. The Kiddie Tax applies adult tax rates to a child’s unearned income over a certain threshold of $2,300 as of 2022.
Several conditions dictate whether a child falls under Kiddie Tax rules:
- The child must have over $2,300 of unearned income.
- At least one living parent must exist.
- The child shouldn’t file a joint return and must be required to file a tax return.
Additionally, the application of the Kiddie Tax considers the child’s age and student status:
- The child is under 18 years old at the end of the year.
- The child has turned 18, but their earned income does not exceed half of their total support.
- The child is a full-time student between 18 and 24, and their earned income does not constitute more than half of their support.
Kiddie Tax and Unearned Income Tax Rules
Reporting a child’s interest and dividend income can be done on your return or separately for your child.
However, a separate return for your child becomes necessary for certain types of income, like earnings from stock sales or other unearned income. Schedule D is the form to use when reporting stock sales.
There are several considerations to remember when deciding whether to report your child’s income on your return.
While it might simplify the process, it may lead to a higher tax bill. Reporting additional income on your return could impact deductions such as those for IRA contributions, student loan interest, and tuition and fees, and also reduce the amount of itemized deductions, including medical expenses.
Moreover, your adjusted gross income (AGI) might increase, affecting eligibility for the American Opportunity Credit, Lifetime Learning Credit, Earned Income Credit (EIC), and the child and dependent care credit. It could also potentially subject you to the Alternative Minimum Tax (AMT) or increase the amount owed.
In some cases, it might be advantageous to file a separate return for your child, especially if they are blind, have investment expenses or other itemized deductions, or are impacted by early savings withdrawal.
Regardless of how you report your child’s income, remember to file Form 8814 with your return if you decide to report the child’s income on your TR. or Form 8615 with your child’s return if you decide to report the child’s income on their separate TR.
When to File Form 8814?
The timing of filing Form 8814 is directly tied to the submission of your federal income tax return. You should file Form 8814 whenever you include your child’s income on your tax return.
This means it should be filed with your tax return annually, usually by April 15th, following the tax year.
You should use Form 8814 if your child meets all the conditions for the Kiddie Tax, which means they are under age 19 (or under age 24 if a full-time student), their income was only from interest and dividends, including capital gain distributions, and Alaska Permanent Fund dividends, and their gross income was less than $11,500 for 2022.
If your child received other types of income or their gross income exceeded the threshold amount, they must file their return.
However, even if you meet the criteria to use Form 8814, it’s essential to consider the possible impacts on your tax situation, as discussed previously. Sometimes, it might be more advantageous for your child to file their return.
What Information Should You Include in Form 8814?
Filling out Form 8814 requires certain vital pieces of information. This includes your child’s name, Social Security number, total income from dividends, interest, capital gain distributions, and Alaska Permanent Fund dividends. Any federal income tax withheld should also be included.
Remember to calculate your child’s gross income by adding together all sources of income and ensure that all data is accurate and up-to-date.
Depending on the situation, you may also need to provide additional details such as your child’s taxable interest, estimated tax payments, and taxable social security benefits.
Each part of Form 8814 requires detailed information, so it’s crucial to thoroughly read the instructions to ensure that you provide the correct information. Incorrectly filled forms can lead to complications and possible penalties from the IRS.
How to File Form 8814?
Filing Form 8814 is a methodical process that requires a certain degree of attention and precision. Let’s walk through the steps to make sure you’re on the right track:
Step 1: Entering Personal Information
The first step involves filling out your child’s basic information, including their name, social security number, and details about their investment income. This is the foundation, and it’s crucial to ensure all information is accurate to avoid any potential IRS complications.
Step 2: Calculating the Reportable Income
Next, you’ll need to determine how much of your child’s investment income you will report on your tax return. Remember, this number cannot exceed your child’s total investment income in the tax year.
The amount should be the dividends, interest, and capital gain distribution during the year. Once reported, the parent should report ALL of the dividends, interest, and capital gain distribution.
Step 3: Establishing the Child’s Tax Rate
Once you’ve determined the income, you must calculate the tax rate applicable to your child for the tax year. The tax rate for dividends and interest is based on parents’ income. This rate would have been used if your child had filed a separate tax return. To do this, you’ll use the tax tables provided by the IRS.
Step 4: Completing and Attach Form 8814
After completing Form 8814, you must attach it to your tax return. Ensure the form includes any other necessary forms and schedules. This completed package must be filed by the regular tax filing deadline, usually April 15th of the following year.
Navigating your child’s tax situation can be complex, especially when they have unearned income. However, tools like Form 8814 can simplify the process, making it easier for you to report your child’s income and fulfill your tax obligations.
Remember to weigh the pros and cons before reporting your child’s income on your return.
Understanding the Kiddie Tax, its rules, and how it impacts your child’s unearned income is crucial to making informed tax decisions.
Consider your overall tax situation and consult a tax professional to ensure you take the best action for your family’s financial well-being.