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Tax on a child’s unearned income: 4 things you need to know

JENNA GRENIER, TAX SHAREHOLDER

 

Doing your own taxes can get confusing and complicated, depending on your situation. Now, imagine filing for yourself and the unearned income of your child or children. Yes, you may have a filing requirement for unearned income even though it’s under your child. If you have assets in a custodial account, then this might apply to you.

It’s called the “kiddie tax” and can be difficult to report depending on the nature of unearned income, the amount, and other factors. The kiddie tax was passed to stop wealthy individuals from transferring their wealth to their children in order to take advantage of their lower tax rates. The kiddie tax has several components, so it’s best to break it down into parts.

 

1. kiddie tax requirements and form 8615

If unearned income for your child is more than $2,200, then your child may be subject to the kiddie tax. If a parents’ tax rate is higher than the child’s, the child’s unearned income in excess of $2,200 is taxed at the parents’ tax rate.  It’s important to note that if children have unearned income in excess of $1,100, they may have to file their own tax return. Your child may have to file form 8615 if their unearned income meets the following conditions:

  • Unearned income is over $2,200
  • Your child meets one of several age requirements- more on this later
  • Your child has at least one parent that’s alive at the end of the tax year
  • Your child is required to file a tax return
  • Your child does not file a joint return for that tax year

The age requirements can be tricky here. Typically, in order to be subject to the kiddie tax, your child has to be under 18 at the end of the tax year or was 18 and didn’t have earned income that was more than half of their support. The other age requirement for kiddie tax is if your child is a full-time student between the ages of 19-23 at the end of the tax year and their earned income was not more than half of their support.

Now, if that wasn’t confusing, your child might also be subject to a Net Investment Income Tax (NIIT) if they have to file form 8615. The NIIT is an additional 3.8% tax calculated on form 8960. Nuances such as this highlight the need to work with a reliable tax professional.

 

2. Form 8814 option

The kiddie tax has two common filing options, form 8615 mentioned before and form 8814. It’s an option for parents who want to declare their child’s investment income. If you decide to take this route, your child won’t have to file a tax return. Here are some of the requirements for this option:

  • Your child’s gross income was less than $11,000
  • Your child was under age 19 (or under 24 if a full-time student)
  • Your child’s only income was from interest, dividends and capital gain distributions
  • No federal taxes were withheld from your child’s income
  • No estimated payments were made
  • You’re the parent qualified for making the election

Although the requirements for form 8814 are similar to 8615, it’s important not to confuse the two and consult a tax professional.

 

3. Changes to the kiddie tax

Changes to tax law happen all the time. For 2020 and beyond, kiddie tax rules are in a pre-TCJA setting. This means that kids who have to report unearned income are taxed at their parents’ marginal tax rates. For a parent, this means that tax season just got more complicated. Rapid changes, and in this case the revival of old rules, can put many people on their toes.

 

4. Let Lutz make your kiddie tax filing a breeze

Filing your own taxes can get complicated, depending on your situation. The kiddie tax only adds to this burden. Lutz has helped people with tax preparation for over 40 years. If your child has unearned income and you need to file under the kiddie tax, contact us for assistance. You can also learn more about our accounting services or read related articles on our accounting blog.

ABOUT THE AUTHOR

308.382.7850

jgrenier@lutz.us

3320 JAMES ROAD

SUITE 100

GRAND ISLAND, NE 68803

JENNA GRENIER + TAX SHAREHOLDER

Jenna Grenier is a Tax Shareholder at Lutz with over 14 years of experience in public accounting. She focuses on providing tax and consulting services to privately held companies and their owners.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Upstream Academy’s Emerging Leaders Academy, Graduate
  • Hall County Leadership Tomorrow Program, Graduate
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of Nebraska, Kearney, NE
  • MBA with Accounting Emphasis, University of Nebraska, Kearney, NE
COMMUNITY SERVICE
  • Grand Island Public Schools Foundation, Board Member
  • Camp Cosmopolitan Ambassadors, Board Member
  • Girls Scouts Spirit of Nebraska Finance Committee, Member
  • St. Paul's Lutheran Church, Member
  • Grand Island Girl Scouts Community Advisory Board, Past Member

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Provider relief fund reporting

The Provider Relief Fund (PRF) Reporting Portal opened for Reporting Period 2 on January 1, 2022, and will remain open through March 31, 2022, at 11:59 PM ET.  What you need to know:

Providers who were required to report in Reporting Period 1, but did not report:

  • Providers who received one or more payments exceeding $10,000 between April 10, 2020 - June 30, 2020, were required to Report in Reporting Period 1.
  • HRSA states that “You are out of compliance with the PRF Terms and Conditions and must return your Payment Period 1 PRF payment(s) to HRSA.”
  • There are additional instructions on the HRSA site for returning payments and other information regarding “non-compliance”

Upcoming Reporting Requirements:

Period Payment Received Period   Deadline to Use Funds Reporting Time Period
3 January 1, 2021, to June 30, 2021 6/30/2022 July 1, 2022, to September 30, 2022
4 July 1, 2021, to December 31, 2021 12/31/2022 January 1, 2023, to March 31, 2023

 

If you have any questions, please contact Paul Baumert, Julianne Kipple or Lauren Duren, or call us at 402-496-8800.

 

Last Updated: 1/14/2022

 

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