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Being a parent with four kids
and one on the way prompted me to address the tax ramifications of
your children’s income. Believe it or not, sometimes your child’s
income must be included on your federal income tax return. In other
circumstances they may be taxed at your income tax rate even though
they may file their own return. The dividing line is whether the
child’s income is earned income or investment income. Children with
investment income may have part or all of this income taxed at their
parents’ tax rate rather than at the child’s rate. Investment income
includes interest, dividends, capital gains and other unearned
income. The child’s tax must be figured using the parents’ rates if
the child has investment income of more than $1,900 and meets one of
three age requirements for 2009:
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The child was born after January 1, 1992.
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The child was born after January 1, 1991, and
before January 2, 1992, and has earned income that does not
exceed one-half of their own support for the year.
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The child was born after January 1, 1986, and
before January 2, 1991, and a full-time student with earned
income that does not exceed one-half of the child’s support for
the year.
When certain conditions are
met, a parent may be able to avoid filing a tax return for the child
by including the child’s income on the parent’s tax return. In this
situation, the parent would file Form 8814, Parents' Election To
Report Child's Interest and Dividends and thereby avoid filing
multiple tax returns. Taxation at the parent’s rates is not an issue
for the earned income of a child. For example, money earned for a
paper route (do kids these days still have paper routes?!),
babysitting and the like would qualify. It seems like only the
“good” kids who put that money into savings get wacked at the
parents’ rate. So, in the end, I guess the government in their
infinite wisdom is telling the youth of the country not save what
they make or they will be taxed just like their parents.”
Michael T. McCormick, JD, LL.M.
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