Form 8814

Form 8814

Form 8814

Form 8814: Compared to other countries, the United States is considered to have one of the most complicated and unnecessarily onerous tax systems worldwide. It gets even more complicated when the tax issues involve children. While common sense would dictate that a four-year old child who has an account that was opened by their parents or other family member that generates passive income would not have an IRS income tax requirement – that would be incorrect. In fact, if a child earns certain passive income, then that income is taxable in the United States if it crosses the threshold for reporting and filing.

If you think it’s hard to get a four-year old to sit still under the best of circumstances, try to imagine sitting next to your little one and having them prepare their own tax return.

While it sounds absurd, if little Billy earns sufficient income to file a tax return — and you do not include his income on your tax return — he is required to file his own tax return. If he has foreign accounts, he may to file the FBAR as well.

In order to avoid the absurdity, parents can prepare form 8814 and attach it to their own tax return in order to claim their child’s income.

Let’s walk through the IRS Form 8814 basics. We have reproduced key portions of the 8814 instructions, with our own summary below.

What is Form 8814?

Use this form if you elect to report your child’s income on your return. If you do, your child will not have to file a return.

You can make this election if your child meets all of the following conditions.

      • The child was under age 19 (or under age 24 if a full-time student) at the end of 2020.

      • The child’s only income was from interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends.

      • The child’s gross income for 2020 was less than $11,000.

      • The child is required to file a 2020 return.

      • The child does not file a joint return for 2020.

      • There were no estimated tax payments for the child for 2020 (including any overpayment of tax from his or her 2019 return applied to 2020 estimated tax).

      • There was no federal income tax withheld from the child’s income

What does this Mean?

It means that in order for a parent to elect to file a form 8814 in lieu of their child filing their own tax return, the child must meet all of the bullet-points identified in the paragraph above. It is important to note the child must meet all of the conditions — and not just one of them.

How do Parents Make the Election?

You qualify to make this election if you file Form 1040, 1040-SR, or 1040-NR and any of the following apply.

      • You are filing a joint return for 2020 with the child’s other parent.

      • You and the child’s other parent were married to each other but file separate returns for 2020 and you had the higher taxable income.

      • You were unmarried, treated as unmarried for federal income tax purposes, or separated from the child’s other parent by a divorce or separate maintenance decree. The child must have lived with you for most of the year (you were the custodial parent). If you were the custodial parent and you remarried, you can make the election on a joint return with your new spouse. But if you and your new spouse do not file a joint return, you qualify to make the election only if you had higher taxable income than your new spouse. Note: If you and the child’s other parent were not married but lived together during the year with the child, you qualify to make the election only if you are the parent with the higher taxable income.

What does this Mean?

This paragraph simply breaks down who is eligible to make the election. And, unlike the preceding paragraph before —  a parent must only meet one of the bullet-points.

Limitations on Tax Benefits

      • If you elect to report your child’s income on your return, you cannot take certain deductions that your child could take on his or her own return such as:

          • Additional standard deduction of $1,650 if the child is blind
          • Penalty on early withdrawal of child’s savings, and
          • Itemized deductions such as the child’s charitable contributions.
      • If your child received qualified dividends or capital gain distributions, you may pay up to $110 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 $1,100 and $2,200 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.
      • If any of the above apply to your child, first figure the tax on your child’s income as if he or she is filing a return. Next, figure the tax as if you are electing to report your child’s income on your return. Then, compare the methods to determine which results in the lower tax.

What does this Mean?

Even when you claim you child’s passive income on your tax return, you are limited as to deductions that you are allowed to take on your return – even if your child would have been allowed to take the deductions on their own return. It also provides that you may pay tax on income which could be exempt if it falls into the zero tax bracket (certain Qualified Dividends or Capital Gain Distributions).

Is Net Investment Income Tax Impacted (NIIT)?

For purposes of figuring any Net Investment Income Tax liability of the parents on Form 8960, the following rules apply.

      • All income reported on line 12 is included in the parents’ modified adjusted gross income, and
      • All net investment income included on line 12 (except for Alaska Permanent Fund dividends) is included in the parents’ net investment income.

What does this Mean?

 Form 8960 refers to NIIT, which is an additional tax for high-income earners with passive income that exceeds certain thresholds (and exceeds the exemption amount). When a parent includes their child’s income, it may impact their own 8960 NIIT. 

Investment Interest Expense

      • Your child’s income (other than qualified dividends, Alaska Permanent Fund dividends, and capital gain distributions) that you report on your return is considered to be your investment income for purposes of figuring your investment interest expense deduction.

      • If your child received qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, see Pub. 550, Investment Income and Expenses, to figure the amount you can treat as your investment income.

What does this Mean?

Certain income you report for you child may qualify towards your investment expense deduction – but certain income is excluded.

What About Foreign Accounts and Trusts?

You must complete Schedule B (Form 1040), Part III, and file it with your tax return if your child:

      • Had a foreign financial account, or 2. Received a distribution from, or was the grantor of, or transferor to, a foreign trust.
      • Enter “Form 8814” on the dotted line next to line 7a or line 8, whichever applies. Complete line 7b if applicable.
      • Note: If you file Form 8814 with your income tax return to report your child’s foreign financial account, you have an interest in the assets from that account and may be required to file Form 8938, Statement of Specified Foreign Financial Assets. See the Form 8938 instructions for details

What does this Mean?

It means if you children has foreign accounts, you must include the information on your own tax return, schedule B (no minor’s exception). In addition, you have also inherited your child’s Form 8938 requirement — since including the information on your own tax return is tantamount to having an interest in the foreign accounts, assets & trusts.

Beware of Form 8814 Pitfalls

In conclusion, while reporting the Form 8814 on your tax return to report a Child’s interest may reduce the tax filing requirements for your children, it may significantly increase your reporting and tax requirements. If foreign accounts, assets or trusts are involved, it can become infinitely more complicated.

Golding & Golding: About Our International Tax Law Firm

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