It may be easier and less expensive to include dependents' income on your tax return rather than have them file their own return—in certain circumstances.
- Dependent's income
- Who is a qualifying-child-dependent?
- Additional election requirements for the child
In certain situations, it may seem easier and less expensive to include a dependents' income on your tax return rather than have them file their own return. IRS rules for claiming a dependent's income on your own tax returns are based on the type of dependent and on both the amount and type of the dependent's income.
The general rule is that a parent can claim a dependent child's investment income on their own return up to a certain amount —above that, the child needs to file themselves. To claim a child’s income on a parent’s tax return, the child needs to be considered a qualifying child dependent of the parent.
Parents can use IRS Form 8814 to elect to report their child’s income on their tax return instead of the child filing their own return. To make this election, the completed form is included with the parent’s tax return.
Who is a qualifying-child-dependent?
Dependent types for tax purposes include both qualifying child and qualifying relative. Only a qualifying child’s income can be claimed on a parent’s tax return. A qualifying child has to meet at least four criteria:
- They must be your child or stepchild, or a brother, sister, stepsibling, or foster child. Descendants of these people also qualify, like your niece.
- They must have lived in your residence with you for more than half of the tax year.
- They must be under age 19 (24 if a full-time student) at the end of the tax year, or any age if permanently disabled.
- The child must not have provided more than half of her own financial support during the year.
Additional election requirements for the child
In addition to being a qualifying child dependent, the child has to meet the following conditions:
- The child’s only income is from interest and dividends, including capital gains distributions and Alaska Permanent Fund dividends.
- The child’s gross income for 2022 is less than $11,500.
- The child is required to file a 2022 return.
- The child does not file a joint return for 2022.
- There were no estimated tax payments for the child for 2022 (including any overpayment of tax from the child’s 2021 return applied to 2022 estimated tax).
- There was no federal income tax withheld from the child’s income.
Additional election requirements for the parent
Once you determine if the above requirements for the child are met, there are certain rules that the parents must meet to qualify to make the election. If married, the parents can make the election if they are filing a joint tax return. If the parents are married filing separate tax returns, then only the parent with highest taxable income can make the election.
If the parents are unmarried, considered unmarried for tax purposes, or divorced or separated by a divorce or separate maintenance decree and did not live together, then the custodial parent can make the election. If the parents are not married but lived together all year, then the parent with the highest taxable income can make the election.
There are various living arrangements that require further analysis. The 2022 tax year Instructions for Form 8814 provide information on almost every scenario for parent and child living arrangements.
The effect of making the election
When making the election to include your child’s income on your tax return, the amounts of qualifying income at $1,150 and below are not taxed. However, the tax on the next $1,150 might be subject to up to $115 more tax if the election is made. This is because the tax on this second $1,150 can be up to 10% on a parent’s return but might qualify for the preferential 0% tax rate for qualified dividends and capital gain distributions if the child filed their own tax return.
There are certain tax benefits that are not available by taking the election. These include:
- The additional standard deduction if the child is blind
- Deduction for any penalty on early withdrawal from the child’s savings
- Itemized deductions that the child might claim on their own return
When including additional income on your tax return by making the election, the parent faces potentially reduced deductions or credits including:
- Deduction for contributions to a traditional IRA
- Deduction for student loan interest
- Itemized deductions for medical expenses and casualty and theft losses
- Credit for child and dependent care expenses
- Child tax credit
- Education tax credits
- Earned income credit
The additional income can also affect the parent’s other tax items such as underpayment of estimated tax, the Alternative Minimum Tax, and the Net Investment Income Tax.
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