Using IRS Form 8814 to Report Your Child’s Unearned Income

Published By: Chad Silver
Last Updated: March 6, 2022

See More in: IRS Forms, Tax Law

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Getting your children interested in finance gives them an excellent knowledge base to make smart investment decisions throughout their lives. Helping them understand the nuances of markets is an important job as a parent. Earning interest and dividends can result in your child needing to file a tax return for their investment income, however, and those amounts must be reported on Internal Revenue Service (IRS) Form 8814, Parent’s Election to Report Child’s Interest and Dividends.

When you should use this form and how is a confusing process. It was historically meant to tax wealthy families who transfer assets to their child to avoid paying higher tax rates themselves, but the impacts have been further reaching.

If you have a child who has taxable unearned income, you may need to report those funds on your own return — and the sum may be taxed at your rate. This guide will help you complete Form 8814 so you can accurately report your child’s interest income come tax season.

What is Unearned Income?

Unearned income means income generated by means other than employment. This income may come from inheritance, property, and equities. Interest and dividends are an outstanding example of investment income that may require you to report your child’s income on your tax return. Earned income, conversely, includes:

Your child will not have earned income, but may have unearned income if you have started their investment life at a young age. When your child’s income comes from interest and dividends, you have an election to report child income on your return. You do that by attaching IRS Form 8814, which reports your child’s interest income on the parent’s tax return.

Types of Unearned Income in Form 8814

This tax may apply to any child who is a dependent and under 19 years old. It can also apply to a full-time student between the ages of 19 and 23. Your child may have unearned income from several sources, including:

Taxable Interest

When you open a savings account for your child, that account will pay interest just like it would for an adult. This interest must be accounted for as interest income.

Dividends

Some investment accounts or purchased individual equities in your child’s name may pay dividends. You must account for your child’s dividend income.

Capital Gains

When you sell an equity that was in an account with your child’s name, they will have capital gains tax that must be paid if that equity increased in value. This can be added to your tax return as an attachment on Form 8814.

Gift Income

Gifts below a certain dollar value are not taxable. If your child has received a substantial gift that holds a large dollar value, it may need to be reported as your child’s income. Gifts are one of many tax incentives, including environmental incentives, you can use to reduce your taxable income.

Claiming Unearned Income on Tax Returns With Form 8814 or Form 8615

For a parent to claim a child’s income on their tax return, certain requirements must be met to use IRS Form 8814. These include:

Once you have determined you meet the criteria for using Form 8814, you need to make sure you have proper documentation ready to complete Form 8814. You may need:

Reporting income on your return from your child’s investment income has advantages and disadvantages. One advantage is filing fewer tax returns, but one disadvantage is potentially missing out on your child’s deductions or paying tax at a higher rate because your child’s income is reported on your tax return.

This brings us to IRS Form 8615. Another option is for your child to file their own tax return and attach Form 8615 to report their unearned income. File this form when your child:

Once the amount of unearned income is determined, you know the rate at which the IRS will tax the income. Your child has the potential to lower their own tax burden when filing Form 8615 instead of Form 8814, but this requires your family to file additional tax returns.

Questions about IRS Form 8814?

Taxes are complex, even more so when you have a dependent child who has interest and dividends to account for at tax time. Deciding whether to include your child’s income on your tax return or have them file their own is a difficult decision that has financial consequences.

Consulting an experienced tax professional can give your family the peace of mind you all deserve, ensuring you know that your incomes are being handled competently. Your decision about whether to use Form 8814 or Form 8615 can be guided by your tax advisor, who can help you make an informed and educated choice about where and how to report your child’s income.

Contact Silver Tax Group today to speak with a tax professional who can answer all of your questions and guide you through the tax filing process for your entire family.