Typically, children are placed in a lower tax bracket than their parents and the reason for this is quite simple: most children don't have that much income, and those that do, rarely earn more than their parents. Some parents have attempted to take advantage of this by putting investments in their children's names, hoping that any investment profits would be taxed at the child's lower rate. In response, the federal government changed the tax treatment of children's unearned income by taxing it at the parent's tax rate. Form 8615 is used to make the child's tax calculations for this income.
"Unearned income" is income gained from a source other than employment, work, or other business activity. Money from work, by contrast, is "earned income." Unearned income includes all forms of investment income, including interest, dividends, most rent and royalty income. It also includes capital gains—the profit you make when you sell something for more than what you paid for it.
Who must file the form?
For 2020, a child must file Form 8615 if all of the following conditions apply:
- The child has more than $2,200 in unearned income
- The child is required to file a tax return
- The child does not file a joint tax return with a spouse
- At least one of the child's parents is alive
- The child is within certain age limits
For tax purposes, the child's "age" is the age on December 31. The child must file the form if any of these conditions apply:
- The child is under 18 at the end of the year
- The child is 18 years old and does not have earned income that is more than half of the child's support for the year, or
- The child was a full-time student age 19-23 and does not have earned income that is more than half of the child's support
Treatment of unearned income
In general, in 2020 the first $1,100 worth of a child's unearned income is tax-free. The next $1,100 is taxed at the child's income tax rate for 2020. Anything above $2,200, however, is taxed at the marginal tax rate of the parent(s), which usually is higher than the child's rate. This tax treatment has gained a nickname: the "kiddie tax." Calculating how much tax applies to the child's income is the purpose of Form 8615.
Information on the form
When filing the form, you must provide the child's name and Social Security Number (SSN) and the name and Social Security Number of a parent, as well as which filing status the parent is using, such as single, joint or married filing separately. The form has three parts:
- Part I identifies the child's net unearned income and how much of it is subject to the kiddie tax
- Part II calculates the kiddie tax based on the parent's tax rate
- Part III calculates the child's tax that is used on the child's Form 1040