Kiddie Tax

If your dependent child has investment income, you may be subject to what is commonly referred to as the "kiddie tax." Investment income is income such as dividends, interest, and capital gains. The IRS defines investment income as all income other than salaries, wages, and other amounts received as pay for work actually done.

If your child is under age 18 at the end of the year and has investment income of more than $1,800 (for your 2008 tax return), the amount above $1,800 will be taxed at the parent's marginal rate. The first $900 of your child's income would not be subject to tax. The next $900 would be taxed at the child's rate (most likely 10%). Any investment income in excess of that amount would be taxed at the parent's marginal rate.

You may choose to report your child's earnings on your return. If you do this, you should complete Form 8814. This will result in an increased adjusted gross income for you. If you make this election, the child does not have to file a return.

You may be eligible to use Form 8615. This form is included with your return, but a separate return will be filed for the child. This will normally result in a lower tax. You can use Form 8615 if all the following apply to you:

• The child is under age 18 at the end of the year.
• The child is required to file a return due to his/her income level.
• The child's investment income exceeded $1,800.

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