Last night I tackled the ugly task of pulling all our tax paperwork together. As much as I’d love to keep our tax records organized throughout the year, that never seems to happen. Anyway, while downloading our 1099-INT Form from ING Direct, I noticed that our kids did pretty well last year in terms of interest earned on their high yield savings account.
For reasons that I won’t go into here, these are not subaccounts under my wife’s and my name. These are actually dedicated accounts in each of our kids’ names. So… Do our kids have to pay taxes on these earnings?
Do kids have to pay taxes?
The short answer is no. The longer answer is that, for the 2009 tax year, you don’t have to file taxes unless your earned income was greater that $5700, or your unearned income (e.g., dividends or interest) was greater than $950. Since their interest earnings are below the $950 threshold, they don’t have to pay taxes.
If they did have to pay taxes, we’d have the choice of attaching it to our own return using IRS Form 8814 (subject to some limitations), or we could complete an individual tax return for each of our kids.
So what about the “kiddie tax”?
If your child’s investment income totals more than $1900, then a portion of their income may be taxed at your rate instead of theirs. The purpose of this so-called “kiddie tax” is to prevent wealthy parents from gifting investments to their young children as a tax dodge.
If you don’t claim this income on your own tax return, then you should use IRS Form 8615 to figure your child’s tax and attach it to their return. Note that, as of 2008, “children” are defined as being under 19 and claimed as a dependent, or full-time students under the age of 24.