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Tax Rules for Children and Dependents, Publication 929 (2007)

What's New for 2007

What's New for 2008

Reminders

Introduction

Useful Items - You may want to see:

Publication

Form (and Instructions)

Part 1. Rules for All Dependents

Terms you may need to know (see Glossary):

Filing Requirements

Earned Income Only

Example —

Unearned Income Only

Example —

Election to report child's unearned income on parent's return.

Earned and Unearned Income

Table 1. 2007 Filing Requirements for Dependents

Example —

Example —

Example —

Other Filing Requirements

Spouse itemizes

Should a Return Be Filed Even If Not Required?

Responsibility for Child's Return

Signing the child's return.

Authority of parent or guardian

Third party designee

Designated as representative

IRS notice

Child's earnings.

Child's expenses.

Example —

Standard Deduction

Table 2

Table 2. Standard Deduction Worksheet for Dependents

Example —

Example —

Example —

Standard Deduction of Zero

Example —

Dependent's Own Exemption

Example —

Withholding From Wages

Conditions for exemption from withholding

Dependents

Exceptions

Example —

Claiming exemption from withholding

Renewing an exemption from withholding

Part 2. Tax on Investment Income of Child Under 18

Terms you may need to know (see Glossary):

Which Parent's Return To Use

Parents Who Do Not File a Joint Return

Parents are married

Parents not living together

Parents are divorced

Custodial parent remarried

Parents never married

Widowed parent remarried

Parent's Election To Report Child's Interest and Dividends

How to make the election

Effect of Making the Election

Rate may be higher

Deductions you cannot take

Deductible investment interest

Alternative minimum tax

Reduced deductions or credits

Penalty for underpayment of estimated tax

Figuring Child's Income

Note.

Qualified dividends

Capital gain distributions

Collectibles (28% rate) gain.

Unrecaptured section 1250 gain

Section 1202 gain

Example —

Figuring Additional Tax

Illustrated Example

Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700

Providing Parental Information (Form 8615, Lines A-C)

Parent with different tax year

Example —

Parent's return information not known timely.

Extension of time to file

Parent's return information not available.

How to request

Step 1. Figuring the Child's Net Investment Income (Form 8615, Part I)

Line 1 (Investment Income)

Illustrated Part I of Form 8615

Investment income defined

Nontaxable income

Capital loss

Income from property received as a gift

Example —

Trust income

Adjustment to income

Line 2 (Deductions)

Directly connected

Example —

Example —

Line 3

Line 4 (Child's Taxable Income)

Child files Form 2555 or 2555-EZ.

Line 5 (Net Investment Income)

Step 2. Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II)

Line 6 (Parent's Taxable Income)

Parent files Form 2555 or 2555-EZ.

Line 7 (Net Investment Income of Other Children)

Example —

Other children's information not available.

Line 8 (Parent's Taxable Income Plus Children's Net Investment Income)

Net capital gain

Qualified dividends

Net capital gain and qualified dividends on line 8

Line 9 (Tax on Parent's Taxable Income Plus Children's Net Investment Income)

Child files Form 2555 or 2555-EZ.

Using the Schedule D Tax Worksheet for line 9 tax

Figuring 28% rate gain (line 11).

Figuring unrecaptured section 1250 gain (line 11).

Using Schedule J for line 9 tax

Line 10 (Parent's Tax)

Line 11 (Tentative Tax)

Lines 12a and 12b (Dividing the Tentative Tax)

Example —

Line 13 (Child's Share of Tentative Tax)

Step 3. Figuring the Child's Tax

Line 14 (Child's Taxable Income in Excess of Net Investment Income)

Net capital gain and qualified dividends on line 14

Line 15 (Tax on Child's Taxable Income in Excess of Net Investment Income)

Child files Form 2555 or 2555-EZ.

Using the Schedule D Tax Worksheet for line 15 tax

Using Schedule J for line 15 tax

Line 16 (Combined Tax)

Line 17 (Tax at Child's Rate)

Child files Form 2555 or 2555-EZ.

Line 18 (Tax)

Child files Form 2555 or 2555-EZ.

Alternative Minimum Tax

Limit on exemption amount

Illustrated Example

Publication 929 - Additional Material

Filled-in Qualified Dividends and Capital Gain Tax Worksheet #1

Filled-in Qualified Dividends and Capital Gain Tax Worksheet #2

Filled-in Qualified Dividends and Capital Gain Tax Worksheet #3

What's New for 2007

Filing requirements. The amount of gross income that many dependents with earned income (wages, tips, etc.) can have during the year without having to file a return has increased. See Filing Requirements in Part 1.

Standard deduction. The standard deduction for many dependents with earned income (wages, tips, etc.) has increased. See Standard Deduction in Part 1.

Alternative minimum tax. The limit on the exemption amount for figuring the alternative minimum tax of a child filing Form 8615 has increased to the child's earned income plus $6,300 (previously $6,050). See Alternative Minimum Tax in Part 2.

What's New for 2008

Increase in age of children whose investment income is taxed at parent's rate. The rules regarding the age of a child whose investment income may be taxed at the parent's tax rate will change for 2008. These rules will continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply to a child who is age 18 at the end of the year, or a student under age 24 at the end of the year, whose earned income is not more than half of the child's support.

Reminders

Social security number (SSN). Dependents who are required to file a tax return must have an SSN. To apply for an SSN, file Form SS-5 with the Social Security Administration. You can go to the website www.socialsecurity.gov for more information.

Individual taxpayer identification number (ITIN). The IRS will issue an ITIN to a nonresident or resident alien who does not have and is not eligible to get an SSN. To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number, with the IRS. It usually takes about 4 to 6 weeks to get an ITIN. The ITIN is entered wherever an SSN is requested on a tax return. If you are a nonresident alien applying for an ITIN to file a tax return, you generally must attach your original, completed return to Form W-7 to get an ITIN. If you are required to include another person's SSN on your return and that person does not have and cannot get an SSN, enter that person's ITIN. An ITIN is for tax use only. It does not entitle you to social security benefits or change your employment or immigration status under U.S. law.

Introduction

Part 1 of this publication explains the filing requirements and other tax information for individuals who can be claimed as a dependent on another person's tax return.

Part 2 explains how to report and figure the tax on certain investment income of children under age 18 (whether or not they can be claimed as dependents).

Useful Items - You may want to see:

Publication

• 501 Exemptions, Standard Deduction, and Filing Information

Form (and Instructions)

• W-4
  Employee's Withholding Allowance Certificate
• 8615
  Tax for Children Under Age 18 With Investment Income of More Than $1,700
• 8814
  Parents' Election To Report Child's Interest and Dividends

Part 1. Rules for All Dependents

Terms you may need to know (see Glossary):

This part of the publication discusses the filing requirements for dependents, who is responsible for a child's return, how to figure a dependent's standard deduction and exemption (if any), and whether a dependent can claim exemption from federal income tax withholding.

Filing Requirements

Whether a dependent has to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind.

The following sections apply to dependents with:

• Earned income only,
• Unearned income only, and
• Both earned and unearned income.

To find out whether a dependent must file, read the section that applies, or use Table 1 on the previous page.

Earned Income Only

A dependent must file a return if all his or her income is earned income, and the total is more than the amount listed in the following table.

Unearned Income Only

A dependent must file a return if all his or her income is unearned income, and the total is more than the amount listed in the following table.

Election to report child's unearned income on parent's return.

Earned and Unearned Income

Table 1. 2007 Filing Requirements for Dependents

Other Filing Requirements

Some dependents may have to file a tax return even if their income is below the amount that would normally require them to file a return.

A dependent must file a tax return if he or she owes any other taxes, such as:

• Social security and Medicare taxes on tips not reported to his or her employer or on wages received from an employer who did not withhold these taxes,
• Uncollected social security and Medicare or railroad retirement taxes on tips reported to his or her employer or on group-term life insurance,
• Alternative minimum tax,
• Additional tax on a health savings account from Form 8889, Part III,
• Recapture taxes, such as the tax from recapture of an education credit, or
• Tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. But if the dependent is filing a return only because of this tax, the dependent can file Form 5329 by itself.

A dependent must also file a tax return if he or she:

• Received any advance earned income credit payments from his or her employers in 2007,
• Had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes, or
• Had net earnings from self-employment of at least $400.

Spouse itemizes

A dependent must file a return if the dependent's spouse itemizes deductions on a separate return and the dependent has $5 or more of gross income (earned and/or unearned).

Should a Return Be Filed Even If Not Required?

Even if a dependent does not meet any of the filing requirements discussed earlier, he or she should file a tax return if either of the following applies.

• Income tax was withheld from his or her income.
• He or she qualifies for the earned income credit, the additional child tax credit, the health coverage tax credit, or the refundable credit for prior year minimum tax. See the tax return instructions to find out who qualifies for these credits.

By filing a return, the dependent can get a refund.

Responsibility for Child's Return

Generally, the child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return. If a child cannot file his or her own return for any reason, such as age, the child's parent or guardian is responsible for filing a return on his or her behalf.

Signing the child's return.

Authority of parent or guardian

A parent or guardian who signs a return on a child's behalf can deal with the IRS on all matters connected with the return. In general, a parent or guardian who does not sign the child's return can only provide information concerning the child's return and pay the child's tax. That parent or guardian is not entitled to receive information from the IRS or legally bind the child to a tax liability arising from the return.

Third party designee

A child's parent or guardian who does not sign the child's return may be authorized, as a third party designee, to discuss the processing of the return with the IRS as well as provide information concerning the return. The child or the person signing the return on the child's behalf must check the “Yes” box in the “Third Party Designee” area of the return and name the parent or guardian as the designee. If designated, a parent or guardian can respond to certain IRS notices and receive information about the processing of the return and the status of a refund or payment. This designation does not authorize the parent or guardian to receive any refund check, bind the child to any tax liability, or otherwise represent the child before the IRS. See the return instructions for more information.

Designated as representative

A parent or guardian who does not sign the child's return may be designated as the child's representative by the child or the person signing the return on the child's behalf. Form 2848, Power of Attorney and Declaration of Representative, is used to designate a child's representative. See Publication 947, Practice Before the IRS and Power of Attorney, for more information. If designated, a parent or guardian can receive information about the child's return but cannot legally bind the child to a tax liability unless authorized to do so by the law of the state in which the child lives.

IRS notice

If you or the child receives a notice from the IRS concerning the child's return or tax liability, you should immediately inform the IRS that the notice concerns a child. The notice will show who to contact. The IRS will try to resolve the matter with the parent(s) or guardian(s) of the child consistent with their authority.

Child's earnings.

If the child does not pay the tax due on this income, the parent may be liable for the tax.

Child's expenses.

Standard Deduction

The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the larger of:

1. $850, or
2. The individual's earned income plus $300, but not more than the regular standard deduction (generally $5,350).

However, the standard deduction for a dependent who is age 65 or older or blind is higher.

Certain dependents cannot claim any standard deduction. See Standard Deduction of Zero, later.

Table 2

Use Table 2to figure the dependent's standard deduction.

Table 2. Standard Deduction Worksheet for Dependents

Standard Deduction of Zero

The standard deduction for the following dependents is zero.

• A married dependent filing a separate return whose spouse itemizes deductions.
• A dependent who files a return for a period of less than 12 months due to a change in his or her annual accounting period.
• A nonresident or dual-status alien dependent, unless the dependent is married to a U.S. citizen or resident alien at the end of the year and chooses to be treated as a U.S. resident for the year. See Publication 519, U.S. Tax Guide for Aliens, for information on making this choice.

Dependent's Own Exemption

A person who can be claimed as a dependent on another taxpayer's return cannot claim his or her own exemption. This is true even if the other taxpayer does not actually claim the exemption.

Withholding From Wages

Employers generally withhold federal income tax, social security tax, and Medicare tax from an employee's wages. If the employee claims exemption from withholding on Form W-4, the employer will not withhold federal income tax. The exemption from withholding does not apply to social security and Medicare taxes.

Conditions for exemption from withholding

An employee can claim exemption from withholding for 2008 only if he or she meets both of the following conditions.

1. For 2007, the employee had a right to a refund of all federal income tax withheld because he or she had no tax liability.
2. For 2008, the employee expects a refund of all federal income tax withheld because he or she expects to have no tax liability.

Dependents

An employee who is a dependent ordinarily cannot claim exemption from withholding if both of the following are true.

• The employee's total income will be more than the minimum standard deduction amount. This amount was $850 for 2007, but may be higher for 2008. Check the instructions for the 2008 Form W-4 for the correct amount.
• The employee's unearned income will be more than $300.

Exceptions

An employee who is age 65 or older or blind, or who will claim adjustments to income, itemized deductions, or tax credits on his or her 2008 tax return, may be able to claim exemption from withholding even if the employee is a dependent. For more information, see the discussions under Exemption From Withholding in chapter 1 of Publication 505, Tax Withholding and Estimated Tax.

Claiming exemption from withholding

To claim exemption from withholding, an employee must enter “Exempt” in the space provided on Form W-4, line 7. The employee must complete the rest of the form, as explained in the form instructions, and give it to his or her employer.

Renewing an exemption from withholding

An exemption from withholding is good for only one year. An employee must file a new Form W-4 by February 15 each year to continue the exemption.

Part 2. Tax on Investment Income of Child Under 18

Terms you may need to know (see Glossary):

The two rules that follow may affect the tax on certain investment income of a child under age 18.

1. If the child's interest and dividend income (including capital gain distributions) total less than $8,500, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. (See Parent's Election To Report Child's Interest and Dividends, later.)
2. If the child's interest, dividends, and other investment income total more than $1,700, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. (See Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700, later.)

For these rules, the term “child” includes a legally adopted child and a stepchild. These rules apply whether or not the child is a dependent.

These rules do not apply if:

• The child is not required to file a tax return (see Filing Requirements in Part 1),
• Neither of the child's parents were living at the end of the tax year, or
• The child files a joint return for the year.

Which Parent's Return To Use

If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the investment income of a child under 18. The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700.

Parents Who Do Not File a Joint Return

For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax.

Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends.

Parents are married

If the child's parents file separate returns, use the return of the parent with the greater taxable income.

Parents not living together

If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in Publication 501.

Parents are divorced

If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent.

Custodial parent remarried

If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Do not use the return of the noncustodial parent. If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies.

Parents never married

If a child's parents did not marry each other, but lived together all year, use the return of the parent with the greater taxable income. If the parents did not live together all year, the rules explained earlier under Parents are divorced apply.

Widowed parent remarried

If a widow or widower remarries, the new spouse is treated as the child's other parent. The rules explained earlier under Custodial parent remarried apply.

Parent's Election To Report Child's Interest and Dividends

You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. If you do, your child will not have to file a return.

You can make this election for 2007 only if all the following conditions are met.

• Your child was under age 18 at the end of 2007. (A child born on January 1, 1990, is considered to be age 18 at the end of 2007; you cannot make the election for this child.)
• Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).
• The dividend and interest income was less than $8,500.
• Your child is required to file a return for 2007 unless you make this election.
• The child does not file a joint return for 2007.
• No estimated tax payment was made for 2007 and no 2006 overpayment was applied to 2007 under your child's name and social security number.
• No federal income tax was taken out of your child's income under the backup withholding rules.
• You are the parent whose return must be used when applying the special tax rules for children under age 18. (See Which Parent's Return To Use, earlier.)

These conditions are also shown in Figure 1.

How to make the election

Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. (If you make this election, you cannot file Form 1040A or Form 1040EZ.) Attach a separate Form 8814 for each child for whom you make the election. You can make the election for one or more children and not for others.

Effect of Making the Election

The federal income tax on your child's income may be more if you make the Form 8814 election.

Rate may be higher

If your child received qualified dividends or capital gain distributions, you may pay up to $42.50 more tax if you make this election instead of filing a separate tax return for the child. This is because the tax rate on the child's income between $850 and $1,700 is 10% if you make this election. However, if you file a separate return for the child, the tax rate may be as low as 5% because of the preferential tax rates for qualified dividends and capital gain distributions.

Deductions you cannot take

By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return.

• The higher standard deduction for a blind child.
• The deduction for a penalty on an early withdrawal of your child's savings.
• Itemized deductions (such as your child's investment expenses or charitable contributions).

Deductible investment interest

If you use Form 8814, your child's investment income is considered your investment income. To figure the limit on your deductible investment interest, add the child's investment income to yours. However, if your child received qualified dividends, capital gain distributions, or Alaska Permanent Fund dividends, see chapter 3 of Publication 550, Investment Income and Expenses, for information about how to figure the limit.

Alternative minimum tax

If your child received tax-exempt interest from a private activity bond, you must determine if that interest is a tax preference item for alternative minimum tax (AMT) purposes. If it is, you must include it with your own tax preference items when figuring your AMT. For more information, get the instructions for Form 6251, Alternative Minimum Tax—Individuals.

Reduced deductions or credits

If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following.

• Deduction for contributions to a traditional individual retirement arrangement (IRA).
• Deduction for student loan interest.
• Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses.
• Total itemized deductions.
• Personal exemptions.
• Credit for child and dependent care expenses.
• Child tax credit.
• Education tax credits.
• Earned income credit.

Penalty for underpayment of estimated tax

If you make this election for 2007 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. If you plan to make this election for 2008, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Get Publication 505 for more information.

Figuring Child's Income

Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Only the amount over $1,700 is added to your income. The amount over $1,700 is shown on Form 8814, line 6. Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Include the amount from Form 8814, line 12, on Form 1040 or Form 1040NR, line 21. If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040 or Form 1040NR, line 21. In the space next to line 21, enter “Form 8814” and the total of the Form 8814, line 12 amounts.

Note.

The tax on the first $1,700 is figured on Form 8814, Part II. See Figuring Additional Tax, later.

Qualified dividends

Enter on Form 8814, line 2a, any ordinary dividends your child received. This amount may include qualified dividends. Qualified dividends are those dividends reported on Form 1040, line 9b, or Form 1040NR, line 10b, and are eligible for the lower tax rates that apply to a net capital gain. For detailed information about qualified dividends, see Publication 550, Investment Income and Expenses. If your child received qualified dividends, the amount of these dividends that is added to your income must be reported on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. You do not include these dividends on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Enter the child's qualified dividends on Form 8814, line 2b. But do not include this amount on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Instead, include the amount from Form 8814, line 9, on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. (The amount on Form 8814, line 9, may be less than the amount on Form 8814, line 2b, because lines 7 through 12 of the form divide the $1,700 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts.)

Capital gain distributions

Enter on Form 8814, line 3, any capital gain distributions your child received. The amount of these distributions that is added to your income must be reported on Schedule D (Form 1040), line 13, or, if you are not required to file Schedule D, on Form 1040, line 13, or Form 1040NR, line 14. You do not include it on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Include the amount from Form 8814, line 10, on Schedule D (Form 1040), line 13; Form 1040, line 13; or Form 1040NR, line 14, whichever applies. (The amount on Form 8814, line 10, may be less than the amount on Form 8814, line 3, because lines 7 through 12 of the form divide the $1,700 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts.)

Collectibles (28% rate) gain.

Unrecaptured section 1250 gain

If any of the child's capital gain distributions are reported on Form 1099-DIV as unrecaptured section 1250 gain, you must determine how much to include on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for line 19 of Schedule D. Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. The numerator is the part of the child's total capital gain distribution that is unrecaptured section 1250 gain. The denominator is the child's total capital gain distribution. Enter the result on line 11 of the Unrecaptured Section 1250 Gain Worksheet.
Please click here for the text description of the image.

Figure 1. Can You Include Your Child's Income On Your Tax Return?

Section 1202 gain

If any of the child's capital gain distributions are reported as section 1202 gain (gain on qualified small business stock) on Form 1099-DIV, part or all of that gain may be eligible for the section 1202 exclusion. (For information about the exclusion, see chapter 4 of Publication 550.) To figure that part, multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. The numerator is the part of the child's total capital gain distribution that is section 1202 gain. The denominator is the child's total capital gain distribution. Your section 1202 exclusion is generally 50% of the result, but may be subject to a limit. See the instructions for Schedule D for details and for information on how to report the exclusion amount.

Figuring Additional Tax

Use Form 8814, Part II, to figure the tax on the $1,700 of your child's interest and dividends that you do not include in your income. This tax is added to the tax figured on your income.

Filled-in Form 8814 for Linda Parks Form: 8814

This additional tax is the smaller of:

1. 10% x (your child's gross income - $850), or
2. $85.

Illustrated Example

David and Linda Parks are married and will file separate tax returns for 2007. Their only child, Philip, is 8. Philip received a Form 1099-INT showing $1,650 taxable interest income and a Form 1099-DIV showing $1,150 ordinary dividends. All the dividends were qualified dividends. His parents decide to include that income on one of their returns so they will not have to file a return for Philip.

First, David and Linda each figure their taxable income (Form 1040, line 43) without regard to Philip's income. David's taxable income is $56,700 and Linda's is $74,300. Because her taxable income is greater, Linda can elect to include Philip's income on her return. (See Which Parent's Return To Use, earlier.)

On Form 8814 (illustrated on the next page), Linda enters her name and social security number, then Philip's name and social security number. She enters Philip's taxable interest income, $1,650, on line 1a. Philip had no tax-exempt interest income, so she leaves line 1b blank. Linda enters Philip's ordinary dividends, $1,150, on line 2a. All of Philip's ordinary dividends were qualified dividends, so Linda also enters $1,150 on line 2b. Philip did not have any capital gain distributions, so she leaves line 3 blank.

Linda adds lines 1a and 2a and enters the result, $2,800, on line 4. Because Philip had qualified dividends, Linda must complete lines 7 through 11 of Form 8814. She includes the amount from line 9 of Form 8814 ($452) on lines 9a and 9b of her Form 1040. On the dotted lines next to lines 9a and 9b, she enters “Form 8814-$452.”

Linda includes $648 in the total on line 21 of her Form 1040 (not illustrated) and in the space next to that line writes “Form 8814-$648.” Adding that amount, plus the $452 of qualified dividends, to her income increases each of the amounts on lines 22, 37, 38, 41, and 43 of her Form 1040 by $1,100. Linda is not claiming any deductions that are affected by the increase to her income. Therefore, her revised taxable income on line 43 is $75,400 ($74,300 + $452 + $648).

On Form 8814, Linda subtracts the $850 shown on line 13 from the $2,800 on line 4 and enters the result, $1,950, on line 14. Because that amount is not less than $850, she enters $85 on line 15. This is the tax on the first $1,700 of Philip's income, which Linda did not have to add to her income. She must add this additional tax to the tax figured on her revised taxable income.

The tax on her $75,400 revised taxable income, figured using the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, is $15,543. She adds $85, and enters the $15,628 total on Form 1040, line 44, and checks box a.
Linda attaches Form 8814 to her Form 1040.

Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700

Part of a child's 2007 investment income may be subject to tax at the parent's tax rate if all of the following statements are true.

• The child was under age 18 at the end of 2007. (A child born on January 1, 1990, is considered to be age 18 at the end of 2007; this child's investment income is not taxed at the parent's tax rate.)
• The child's investment income was more than $1,700.
• The child is required to file a tax return for 2007.
• The child does not file a joint return for 2007.

These conditions are also shown in Figure 2.

If neither parent was alive on December 31, 2007, do not use Form 8615. Instead, figure the child's tax in the normal manner.

If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Attach the completed form to the child's Form 1040, Form 1040A, or Form 1040NR.

The following discussions explain the parental information needed for Form 8615 and the steps to follow in figuring the child's tax.

Providing Parental Information (Form 8615, Lines A-C)

On Form 8615, lines A and B, enter the parent's name and social security number. (If the parents filed a joint return, enter the name and social security number listed first on the joint return.) On line C, check the box for the parent's filing status.

See Which Parent's Return To Use, earlier, for information on which parent's return information must be used on Form 8615.

Parent with different tax year

If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year.

Parent's return information not known timely.

Extension of time to file

Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. You can file a paper Form 4868 or you can file it electronically. See the instructions for Form 4868 for details. An extension of time to file is not an extension of time to pay. You must make an accurate estimate of the tax for 2007. If you do not pay the full amount due by the regular due date, the child will owe interest and may also be charged penalties. See Form 4868 and its instructions.

Parent's return information not available.

How to request

After the end of the tax year, send a signed, written request for the information to the Internal Revenue Service Center where the parent's return will be filed. (The IRS cannot process a request received before the end of the tax year.) You should also consider getting an extension of time to file the child's return, because there may be a delay in getting the requested information. The request must contain all of the following.

• A statement that you are making the request to comply with section 1(g) of the Internal Revenue Code and that you have tried to get the information from the parent.
• Proof the child is under 18 years of age (for example, a copy of the child's birth certificate).
• Evidence the child has more than $1,700 of unearned income (for example, a copy of the child's prior year tax return or copies of Forms 1099 for the current year).
• The name, address, social security number (if known), and filing status (if known) of the parent whose information is to be shown on Form 8615.

Figure 2. Do You Have To Use Form 8615 To Figure Your Child's Tax?

Step 1. Figuring the Child's Net Investment Income (Form 8615, Part I)

The first step in figuring a child's tax using Form 8615 is to figure the child's net investment income. To do that, use Form 8615, Part I. For an example, see the Illustrated Part I of Form 8615 on the next page.

Line 1 (Investment Income)

If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Adjusted gross income is shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 36. Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615 must be filed.

If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form.

Illustrated Part I of Form 8615

Investment income defined

Investment income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, and certain distributions from trusts. Investment income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).

Nontaxable income

For this purpose, investment income includes only amounts the child must include in total income. Nontaxable investment income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included.

Capital loss

A child's capital losses are taken into account in figuring the child's investment income. Capital losses are first applied against capital gains. If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other investment income. Any difference over $3,000 is carried to the next year.

Income from property received as a gift

A child's investment income includes all income produced by property belonging to the child. This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. A child's investment income includes income produced by property given as a gift to the child. This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act.

Trust income

If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other investment income from the trust are investment income to the child. However, taxable distributions from a qualified disability trust are considered earned income for the purposes of completing Form 8615. See the Form 8615 instructions for details.

Adjustment to income

In figuring the amount to enter on line 1, the child's investment income is reduced by any penalty on the early withdrawal of savings.

Line 2 (Deductions)

If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $1,700 on line 2.

If the child does itemize deductions, enter on line 2 the larger of:

1. $850 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29 (or Schedule A (Form 1040NR), line 17), that are directly connected with the production of the investment income entered on line 1, or
2. $1,700.

Directly connected

Itemized deductions are directly connected with the production of investment income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Only the amount greater than 2% of the child's adjusted gross income can be deducted. See Publication 529, Miscellaneous Deductions, for more information.

Line 3

Subtract line 2 from line 1 and enter the result on this line. If zero or less, do not complete the rest of the form. However, you must still attach Form 8615 to the child's tax return. Figure the tax on the child's taxable income in the normal manner.

Line 4 (Child's Taxable Income)

Enter on line 4 the child's taxable income from Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 40.

Child files Form 2555 or 2555-EZ.

Line 5 (Net Investment Income)

A child's net investment income cannot be more than his or her taxable income. Enter on Form 8615, line 5, the smaller of line 3 or line 4. This is the child's net investment income.

If zero or less, do not complete the rest of the form. However, you must still attach Form 8615 to the child's tax return. Figure the tax on the child's taxable income in the normal manner.

Illustrated Part II of Form 8615

Step 2. Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II)

The next step in completing Form 8615 is to figure a tentative tax on the child's net investment income at the parent's tax rate. The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net investment income (plus the net investment income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it.

When figuring the tentative tax at the parent's tax rate, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net investment income. For example, do not refigure the medical expense deduction.

Figure the tentative tax on lines 6 through 13. For an example, see the Illustrated Part II of Form 8615.

Line 6 (Parent's Taxable Income)

Enter on line 6 the amount from the parent's Form 1040, line 43; Form 1040A, line 27; Form 1040EZ, line 6; Form 1040NR, line 40; or Form 1040NR-EZ, line 14. If the parent's taxable income is zero or less, enter zero on line 6.

Parent files Form 2555 or 2555-EZ.

Line 7 (Net Investment Income of Other Children)

If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Do not include the amount from line 5 of the Form 8615 being completed.

Other children's information not available.

Line 8 (Parent's Taxable Income Plus Children's Net Investment Income)

Enter on this line the total of lines 5, 6, and 7. You must determine the amount of net capital gain and qualified dividends included on this line before completing line 9 of Form 8615.

Net capital gain

Net capital gain is the smaller of the gain, if any, on Schedule D, line 15, or the gain, if any, on Schedule D, line 16. If Schedule D is not required, it is the amount on Form 1040, line 13; Form 1040A, line 10; or Form 1040NR, line 14.

Qualified dividends

Qualified dividends are those dividends reported on line 9b of Form 1040 or Form 1040A, or line 10b of Form 1040NR.

Net capital gain and qualified dividends on line 8

If neither the child nor the parent nor any other child has net capital gain, the net capital gain on line 8 is zero. If neither the child, nor the parent, nor any other child has qualified dividends, the amount of qualified dividends on line 8 is zero. If the child, parent, or any other child has net capital gain, figure the amount of net capital gain included on line 8 by adding together the net capital gain amounts included on lines 5, 6, and 7 of Form 8615. If the child, parent, or any other child has qualified dividends, figure the amount of qualified dividends included on line 8 by adding together the qualified dividend amounts included on lines 5, 6, and 7. Use the instructions for Form 8615, line 8, including the appropriate Line 5 Worksheet, to find these amounts.

Line 9 (Tax on Parent's Taxable Income Plus Children's Net Investment Income)

Figure the tax on the amount on line 8 using the Tax Table, the Tax Computation Worksheet, the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040, 1040A, or 1040NR instructions), the Schedule D Tax Worksheet (in the Schedule D instructions) or Schedule J (Form 1040), as follows.

• If line 8 does not include any net capital gain or qualified dividends, use the Tax Table or Tax Computation Worksheet to figure this tax. But if Schedule J, Income Averaging for Farmers and Fishermen, is used to figure the tax on the parent's return, use it to figure this tax.
• If line 8 does include any net capital gain or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet to figure this tax. For details, see the instructions for Form 8615, line 9. However, if the child, parent, or another child has 28% rate gain or unrecaptured section 1250 gain, use the Schedule D Tax Worksheet. But if Schedule J is used to figure the tax on the parent's return, use it to figure this tax.

Child files Form 2555 or 2555-EZ.

Using the Schedule D Tax Worksheet for line 9 tax

Use the Schedule D Tax Worksheet in the Schedule D instructions to figure the line 9 tax on Form 8615 if the child, parent, or any other child has unrecaptured section 1250 gain or 28% rate gain. If you must use the Schedule D Tax Worksheet, first complete any Schedule D and any actual Schedule D Tax Worksheet required for the child, parent, or any other child. Then figure the line 9 tax using another Schedule D Tax Worksheet. (Do not attach this Schedule D Tax Worksheet to the child's return.) Complete this Schedule D Tax Worksheet as follows.

1. On line 1, enter the amount from Form 8615, line 8.
2. On line 2, enter the qualified dividends included on Form 8615, line 8. (See the earlier discussion for line 8.)
3. On line 3, enter the total of the amounts, if any, on line 4g of all Forms 4952 filed by the child, parent, or any other child.
4. On line 4, enter the total of the amounts, if any, on line 4e of all Forms 4952 filed by the child, parent, or any other child. If applicable, include instead the smaller amount entered on the dotted line next to line 4e.
5. On lines 5 and 6, follow the worksheet instructions.
6. On line 7, enter the net capital gain included on Form 8615, line 8. (See the earlier discussion for line 8.)
7. On lines 8 through 10, follow the worksheet instructions.
8. On line 11, enter zero if neither the child, parent, nor any other child has unrecaptured section 1250 gain (line 19 of Schedule D) or 28% rate gain (line 18 of Schedule D). Otherwise, enter the amount of unrecaptured section 1250 gain and 28% rate gain included in the net capital gain on line 8 of Form 8615. Figure these amounts as explained later under Figuring unrecaptured section 1250 gain (line 11) and Figuring 28% rate gain (line 11).
9. If the Foreign Earned Income Tax Worksheet was used to figure the parent's tax or the tax of any child, go to step 10 below. Otherwise, skip steps 10, 11, and 12 below, and go to step 13.
10. Determine whether there is a line 8 capital gain excess as follows.