Parent's Election To Report Child's Interest and Dividends(p9)

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 only if all the following conditions are met.

• Your child was under age 19 (or under age 24 if a full-time student) at the end of the year.
• Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).
• The child's gross income was less than $9,500.
• The child is required to file a return unless you make this election.
• The child does not file a joint return for the year.
• No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year 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. (See Which Parent's Return To Use, earlier.)

These conditions are also shown in Figure 1.

A child born on January 1, 1994, is considered to be age 19 at the end of 2012. You cannot make this election for such a child unless the child was a full-time student.

A child born on January 1, 1989, is considered to be age 24 at the end of 2012. You cannot make this election for such a child.

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.

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

If your child received qualified dividends or capital gain distributions, you may pay up to $95 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 $950 and $1,900 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 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions.

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 additional 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).

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 for information about how to figure the limit.

If your child received tax-exempt interest (or exempt-interest dividends paid by a regulated investment company) from certain private activity bonds, 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.

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.
• Credit for child and dependent care expenses.
• Child tax credit.
• Education tax credits.
• Earned income credit.

If you make this election for 2012 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 2013, 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.

Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Only the amount over $1,900 is added to your income. The amount over $1,900 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. On the dotted line next to line 21, enter "Form 8814" and the total of the Form 8814, line 12 amounts.

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 lower tax rates that apply to a net capital gain. For detailed information about qualified dividends, see Publication 550.

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 $1,900 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.)

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, 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 $1,900 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.)

If any of the child's capital gain distributions are reported on Form 1099-DIV as collectibles (28% rate) gain, you must determine how much to also include on line 4 of the 28% Rate Gain Worksheet, in the instructions for Schedule D, line 18. 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 collectibles (28% rate) gain. The denominator is the child's total capital gain distribution. Enter the result on line 4 of the 28% Rate Gain Worksheet.

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 Schedule D, line 19. 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 the Unrecaptured Section 1250 Gain Worksheet, line 11.

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. In some cases, the exclusion is more than 50%. See the instructions for Schedule D for details and information on how to report the exclusion amount.

Fred is 6 years old. In 2012, he received dividend income of $2,000, which included $1,500 of ordinary dividends and a $500 capital gain distribution from a mutual fund. (None of the distributions were reported on Form 1099-DIV as unrecaptured section 1250 gain, section 1202 gain, or collectibles (28% rate) gain.) All of the ordinary dividends are qualified dividends. 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 figure the amount to report on Form 1040, lines 9a and 9b, the amount to report on their Schedule D, line 13, and the amount to report on Form 1040, line 21, as follows.

They leave lines 1a and 1b of Form 8814 blank because Fred does not have any interest income. They enter his ordinary dividends of $1,500 on lines 2a and 2b because all of Fred's ordinary dividends are qualified dividends. They enter the amount of Fred's capital gain distributions, $500, on line 3. Next, they add the amounts on lines 1a, 2a, and 3 and enter the result, $2,000, on line 4.

They subtract the base amount on line 5, $1,900, from the amount on line 4, $2,000, and enter the result, $100, on line 6. This is the total amount from Form 8814 to be reported on their return. Next, they figure how much of this amount is qualified dividends and how much is capital gain distributions.

• They divide the amount on line 2b, $1,500, by the amount on line 4, $2,000. They enter the result, .75, on line 7.
• They divide the amount on line 3, $500, by the amount on line 4, $2,000. They enter the result, .25, on line 8.
• They multiply the amount on line 6, $100, by the decimal on line 7, .75, and enter the result, $75, on line 9.
• They multiply the amount on line 6, $100, by the decimal on line 8, .25, and enter the result, $25, on line 10.
• They include the amount from line 9, $75, on lines 9a and 9b of their Form 1040 and enter "Form 8814 – $75" on the dotted lines next to lines 9a and 9b. They include the amount from line 10, $25, on line 13 of their Schedule D (Form 1040) and enter "Form 8814 – $25" on the dotted line next to Schedule D, line 13.

They enter $100 ($75 + $25) on line 11 and -0- ($100 – $100) on line 12. Because the amount on line 12 is -0-, they do not include any amount from Form 8814 on their Form 1040, line 21.

Use Form 8814, Part II, to figure the tax on the $1,900 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% x (your child's gross income − $950), or
2. $95.

David and Linda Parks are married and will file separate tax returns for 2012. 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 (shown later), 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 ($370) on lines 9a and 9b of her Form 1040. On the dotted lines next to lines 9a and 9b, she enters "Form 8814–$370."

Linda includes $530 in the total on line 21 of her Form 1040 (not illustrated) and in the space next to that line writes "Form 8814–$530." Adding that amount, plus the $370 of qualified dividends, to her income increases each of the amounts on lines 22, 37, 38, 41, and 43 of her Form 1040 by $900. Linda is not claiming any deductions that are affected by the increase to her income due to her election to use Form 8814. Therefore, her revised taxable income on line 43 is $75,200 ($74,300 + $370 + $530).

On Form 8814, Linda subtracts the $950 shown on line 13 from the $2,800 on line 4 and enters the result, $1,850, on line 14. Because that amount is not less than $950, she enters $95 on line 15. This is the tax on the first $1,900 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 $75,200 revised taxable income, figured using the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, is $14,897. She adds $95, and enters $14,992 on Form 1040, line 44, and checks box a.
Linda attaches Form 8814 to her Form 1040.