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 2001 only if all the following conditions are met.

  1. Your child was under age 14 on January 1, 2002.
  2. Your child is required to file a return for 2001 unless you make this election.
  3. Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).
  4. The dividend and interest income was less than $7,500.
  5. No estimated tax payments were made for 2001 and no 2000 overpayment was applied to 2001 under your child's name and social security number.
  6. No federal income tax was taken out of your child's income under the backup withholding rules.
  7. You are the parent whose return must be used when applying the special tax rules for children under 14. (See Which Parent's Return To Use, earlier.)
These conditions are also shown in Figure 1 on the next page.

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 rather than file a return for the child.

Rates may be higher. If you use Form 8814, the child's income may be taxed at a higher rate on your return than it would be on the child's own return.

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.

  1. The higher standard deduction for a blind child.
  2. The deduction for a penalty on an early withdrawal of your child's savings.
  3. 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 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.

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

Penalty for underpayment of estimated tax. If you make this election for 2001 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 2002, 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 Part I of Form 8814 to figure your child's interest and dividend income to report on your return. Only the amount over $1,500 is added to your income. This amount is shown on line 6 of Form 8814. Include this amount on line 21 of Form 1040 or Form 1040NR. In the space next to line 21, write "Form 8814." If you file more than one Form 8814, include the total amounts from line 6 of all your Forms 8814 on line 21.

Capital gain distributions. Enter on line 3 of Form 8814 any capital gain distributions your child received. The amount of these distributions that is added to your income must be reported on line 13 of Schedule D (Form 1040) or, if you are not required to file Schedule D, on line 13 of Form 1040. You do not include it on line 6 of Form 8814 or on line 21 of Form 1040. The amount of the distributions that is added to your income is the amount over the allocable part of $1,500.

Pencil: Use the following worksheet to figure the amount to report as capital gain distributions on Schedule D or directly on Form 1040 and the amount to report on Form 8814, line 6.

Worksheet for Child's
Capital Gain Distributions
(Keep for your records)
1. Enter amount from Form 8814, line 3     
2. Enter amount from Form 8814, line 4     
3. Divide line 1 by line 2     
4. Base amount   $1,500  
5. Subtract line 4 from line 2     
6. Multiply line 5 by the decimal on line 3. Enter the result here and on Schedule D, line 13, column (f), or on line 13 of Form 1040     
7. Subtract line 6 from line 5. Enter the result here and on Form 8814, line 6     

On the dotted line next to line 6, Form 8814, write "CGD" and the amount from line 6 of this worksheet. On the dotted line next to line 13, Schedule D, or line 13, Form 1040, write "Form 8814" and the amount from line 6 of this worksheet.

28% rate gain. If any of the child's capital gain distributions are reported on Form 1099-DIV as 28% rate gain, you must determine how much to also include on Schedule D, line 13, column (g). Multiply the child's capital gain distribution included on line 13, column (f), by a fraction. The numerator is the part of the child's total capital gain distribution that is 28% rate gain. The denominator is the child's total capital gain distribution.

Qualified 5-year gain. If any of the child's capital gain distributions are reported on Form 1099-DIV as qualified 5-year gain, you must determine how much to also include on line 2 of the Qualified 5-Year Gain Worksheet in the instructions for line 29 of Schedule D. Multiply the child's capital gain distribution included on line 13, column (f), by a fraction. The numerator is the part of the child's total capital gain distribution that is qualified 5-year gain. The denominator is the child's total capital gain distribution.

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 line 13, column (f) 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.

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 line 13, column (f) 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 information on how to report the exclusion amount.

Example. Fred is 6 years old. In 2001, he received dividend income of $1,600, which included $1,280 of ordinary dividends and a $320 capital gain distribution from a mutual fund. (None of the distributions were reported on Form 1099-DIV as 28% gain, qualified 5-year gain, unrecaptured section 1250 gain, or section 1202 gain.) He has no other income and is not subject to backup withholding. No estimated tax payments were made under his name and social security number.

Fred's parents elect to include Fred's income on their tax return instead of filing a return for him. They enter $1,280 on line 2 and $320 on line 3, Form 8814.

$100 of Fred's income must be included as income on his parents' tax return ($1,600 gross income minus $1,500). They figure the amount to report on line 13 of their Schedule D and the amount to report on line 6, Form 8814, as follows.
Worksheet for Child's
Capital Gain Distributions
(Keep for your records)
1. Enter amount from Form 8814, line 3   $  320  
2. Enter amount from Form 8814, line 4   1,600  
3. Divide line 1 by line 2   .20  
4. Base amount   1,500  
5. Subtract line 4 from line 2   100  
6. Multiply line 5 by the decimal on line 3. Enter the result here and on Schedule D, line 13, column (f), or on line 13 of Form 1040   20  
7. Subtract line 6 from line 5. Enter the result here and on Form 8814, line 6   $   80  
On Form 8814, Fred's parents enter $80 on line 6 and write "CGD-$20" on the dotted line next to line 6. They include the $80 on line 21 of their Form 1040 and write "Form 8814-$80" on the dotted line next to the total.

On Schedule D, they include $20 on line 13, column (f), and write "Form 8814-$20" on the dotted line next to this line.

Figuring Additional Tax

Use Part II of Form 8814 to figure the tax on the $1,500 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.

This additional tax is the smaller of:

  1. 10% × (your child's gross income - $750), or
  2. $75.

Include the amount from line 9 of all your Forms 8814 in the total on line 40, Form 1040, or line 39, Form 1040NR. Check box a on Form 1040, line 40, or Form 1040NR, line 39.

Filled-in Form 8814 for Linda Parks Form: 8814

Illustrated Example

David and Linda Parks are married and will file separate tax returns for 2001. Their only child, Philip, is 8. Philip received a Form 1099-INT showing $3,200 taxable interest income and a Form 1099-DIV showing $300 ordinary 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 39) without regard to Philip's income. David's taxable income is $41,700 and Linda's is $59,300. Because her taxable income is greater, Linda can elect to include Philip's income on her return.

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, $3,200, on line 1a. Philip had no tax-exempt interest income, so she leaves line 1b blank. Linda enters Philip's ordinary dividends, $300, on line 2. Philip did not have any capital gain distributions, so she leaves line 3 blank.

Linda adds lines 1a and 2 and enters the result, $3,500, on line 4. From that amount she subtracts the $1,500 base amount shown on line 5 and enters the result, $2,000, on line 6. This is the part of Philip's income that Linda must add to her income.

Linda includes the $2,000 in the total on line 21 of her Form 1040 (not illustrated) and in the space next to that line writes "Form 8814-$2,000." Adding that amount to her income increases each of the amounts on lines 22, 33, 34, 37, and 39 of her Form 1040 by $2,000. Linda is not claiming any deductions or credits that are affected by the increase to her income. Therefore, her revised taxable income on line 39 is $61,300 ($59,300 + $2,000).

On Form 8814, Linda subtracts the $750 shown on line 7 from the $3,500 on line 4 and enters the result, $2,750, on line 8. Because that amount is not less than $750, she enters $75 on line 9. This is the tax on the first $1,500 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 $61,300 revised taxable income is $14,240. She adds $75, enters the $14,315 total on line 40 of Form 1040, and checks box a.

Linda attaches Form 8814 to her Form 1040.