By Mark Castro, CPA
Updated: October 28, 2021
Form 8615 is required to be used when a taxpayer’s child had unearned income over $2,200 and is:
The unearned income of the child is taxed at the parent’s rate if the parent’s rate is higher than the child’s rate.
Form 8615 must be filed for any child who meets all of the following:
Child includes the a legally adopted child and a stepchild.
These rules apply whether or not the child is a dependent.
Applies to a taxpayer’s children who are under 18 or the child’s earned income is less than half their support and they are age 18 or a full-time student age 19 – 23.
The Kiddie Tax is reported on the child’s federal return and thus, it is paid with the child’s tax return.
The tax rates and brackets used to figure the tax on a child’s unearned income were modified in the Secure Act that was included in the 2020 Appropriations legislation enacted on December 20, 2019.
For tax years beginning in 2020, dependent children with unearned income above a certain amount ($2,200 for 2021) are taxed at the parent’s individual tax rate if the parent’s rate is higher than the child’s tax rate.
For tax years 2018 and 2019, the tax on Form 8615 may be calculated using the tax rates for estates and trusts or the tax rate of the parent – whichever is less. If the parent’s rate is chosen, an election must be made of Form 8615 for 2018 or 2019.
A child’s capital gain income and loss are included in the calculation of their unearned income for Kiddie Tax purposes.
Since the child’s unearned income in excess of $2,200, the child is allowed to deduction $2,200 from their total unearned income if they do not have itemized deduction on their return.
If they do have itemized deductions then they are allowed to subtract from their total unearned income $1,100 plus the portion of their total itemized deductions (Schedule A, line 17), that is directly connected with the production of their unearned income reported on Form 8615, line 1.
Under the American Rescue Plan Act for tax year 2020 only, the first $10,200 of unemployment compensation is excluded from income provided the taxpayer’s adjusted gross income (AGI) is less than $150,000.
Kiddie Tax and Covid UnemploymentFor Kiddie tax purposes in 2020, the unemployment benefits in excess of $10,200 received by the child are treated as unearned income.
For the parent, if the parent’s AGI is greater than $150,000 and they received unemployment compensation in 2020, the exclusion will not apply and thus the parent’s taxable income will include the entire unemployment compensation amount and will be reflected in their tax rate and therefore the tax rate at which the child’s unearned income will be taxed at will be higher.
For Form 8615, unearned income includes all taxable income other than earned income.
Examples of unearned income are:
Earned income includes wages, tips, and other payments received for personal services performed.
It also includes any taxable distribution from a qualified disability trust.
If the child is a sole proprietor or a partner in a trade or business in which both personal services and capital are material income producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of the child’s share of the net profits from that trade or business.
If capital is not an income-producing factor and the child’s personal services produced the business income, all of the child’s gross income from the trade or business is considered earned income.
The Tax for Certain Children Who Have Unearned Income that is reported on Form 8615 was changed in the Secure Act which was included in the 2020 Appropriations legislation enacted on December 20, 2019.
Effective for tax years beginning in 2020, the Kiddie Tax will revert back to the rules that were in effect before 2018. This means the tax on unearned income for certain children will be calculated based on the tax rate of the parent.
As part of this change, the legislation allows the Kiddie Tax to also be calculated using the tax rate of the parent if an election is made on Form 8615 for Tax Years 2018 and 2019.
Therefore, for Tax Year 2019 the Kiddie Tax may be calculated using the tax rates for estates and trusts or the tax rate of the parent - whichever is less. If the parent rate is chosen, they must make an election on Form 8615.
For more information see the following on the IRS website: