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?
Types of Unearned Income in Form 8814
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:
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:
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.