IRS Tax Tip 2003-50, (March 12, 2003) -- Part or all of a child's investment income may be taxed at the parent's rate rather than the child's rate, according to the IRS. Because a parent's taxable income is usually higher than a child's income, the parent's top tax rate will often be higher as well. This special method of figuring the federal income tax only applies to children who are under the age of 14. For 2002, it applies if the child's total investment income for the year was more than $1,500. Investment income includes interest, dividends, capital gains, and other unearned income.
To figure the child's tax using this method, fill out
Alternatively, a parent can, in many cases, choose to report the child's investment income on the parent's own tax return. This option is available if the child's income consists entirely of interest and dividends (including capital gain distributions) and the amount received is less than $7,500. Eligible parents can choose this option by filling out
These special tax rules do not apply to investment income received by children who are age 14 and over. In addition, wages and other earned income received by a child of any age are taxed at the child's normal rate.
More information can be found in
