For several decades parents have endeavored to reduce the taxes on their own investment income by transferring some of their investments to their children with a goal of having the child pay the income taxes, but at the lower child’s rate. Investment income includes, but is not limited to, interest, dividends, capital gains, annuities etc. This tax avoidance strategy may work in some situations. However, if the total investment income is more than $1900.00/year, the excess will still be taxed at the higher parental tax rate. This situation could also occur if the child meets any one of the three age criteria (see below).
You should read IRS Publication 929, “Tax Rules for Children and Dependents”. You may have to include Form 8615 (“Tax For Children Who Have Investment Income of More Than $1.900.00”) with the child’s tax return to have the income taxed at the parent’s rate. Form 8814 (“Parent’s Election to Report Child’s Interest and Dividends”) will avoid having the child file a return but the interest, dividends etc will be reported and taxed at the parent’s rate. (more…)