If you claim your child as a dependent, he or she may have to file their own return if they received wages or passive income (such as interest or dividends) during the year. If the only income your child received was passive income, you may be able to report that dependent’s income on your own return.
For 2003, your dependent will have to file a Federal tax return if he or she earned over $4,750 in wages during the year. The first $4,750 of wages is essentially tax free. However, if your child earned $4,750 or less, but had Federal income tax withheld, then he or she should file a return to get back the tax withheld.
Interest and Dividend Income
all of your child’s income was in the form of interest, dividends, and capital gain distributions (e.g., from mutual funds), and
the amount is more than $750 but less than $7,500, and
your child was UNDER the age of 14 on December 31, 2003,
you can elect to report the income on your own return rather than filing a separate return for the child. This is permitted as a measure to save you time from having to file a separate return for your child. If you elect to include your child’s income on your return, you are required to include Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for each child as an attachment to your tax return.
If you elect to file a return for your under-14 child, and if his or her investment income was more than $1,500, the income will be taxed at YOUR (the parent’s) rate if that rate is higher than the child’s rate. You perform these calculations on form 8615 that must be attached to the child’s return.
Capital Gain Distributions
If your child received capital gain distributions (such as from mutual funds), report them on your Schedule D, rather than including them with the rest of the child’s income on Line 6 of your Form 8814. That way your child will benefit from the lower capital gains tax rate.
There are special rules to be followed for different filing and marital statuses:
Married Filing Separately
The parent with higher income must report all of the children’s income on his or her own return. Similarly, if the parents live together but are not married, the higher-income parent must report.
Legally Divorced or Separated
The parent with custody (custodial parent) for the greater part of the year should include the child’s income. If the custodial parent has remarried and is filing separately with a stepparent, the stepparent should include the child’s income if the stepparent’s income is higher than the custodial parent’s.
You cannot report the child’s income on your own return if any tax was withheld from the child’s income, or if he or she made estimated tax payments during the year. In that case, the child would have to file his or her own return.
If you report the child’s income, you can’t claim any deductions for the child, such as:
a higher standard deduction if the child was blind,
the deduction for a penalty on early withdrawal of savings, or
any itemized deductions such as investment expenses or charitable contributions.