Beware of Kiddie Tax – Part II

Your Guide to State, Local, Federal, Estate + International Taxation

Computing the kiddie tax

If the kiddie tax applies to a child, the child’s tax is calculated as the greater of one of two items:

  1. The tax on all of the child’s income, calculated at the rates applicable to single individuals; or
  2. The sum of two things:
  • The tax that would be imposed on a single individual if the child’s taxable income were reduced by net unearned income, plus
  • The child’s share of the allocable parental tax.

The allocable parent tax is the amount of the increase in the parent’s tax liability that results from adding to the parent’s taxable income the net unearned income of the parent’s children who are subject to the kiddie tax. If a parent has more than one child with unearned income subject to the kiddie tax, then each child’s share of the allocable parental tax would be assigned pro rata according to the ratio that its net unearned income bears to the aggregate net unearned income subject to the kiddie tax.

Which tax form should you use?

A parent with a child or children whose unearned income is subject to the kiddie tax must generally complete and file Form 8615 with his or her tax return. However, if the child’s unearned income is less than $10,500 for 2015, the parent may be able to elect to include that income on the parent’s return rather than file a separate return for the child. In this case, the parents should complete Form 8814. However, the IRS cautions that the federal income tax owed on a child’s income may be lower if the parent files a separate tax return for the child, which would enable him or her to take certain tax benefits that cannot be taken on the parents’ return.

Divorced, separated, or unmarried parents

Special rules may apply to children of divorced, separated or unmarried parents. Please contact our office to determine how the kiddie tax may be treated in your situation.

By Danette Jespersen, EA