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Spokane, Washington  Est. May 19, 1883

Tax Rules Covering Child Income Anything But Cute

Associated Press

There’s nothing cute about kids and taxes. The rules covering children’s income are enough to make some grownups throw a tantrum or two.

“Figuring out who has to file isn’t the easiest thing in the world … and if you try to do it (the return) by hand, it can be annoying,” said Andrea Markezin, a principal for the accounting firm Ernst & Young.

That’s because the federal government imposes some rather esoteric guidelines for taxing children’s income.

A dependent child must file a return if earned income exceeds $3,800 a year or if self-employed income reaches $400. (The youngster may also want to file even if earnings were less than those amounts in order to claim a refund of any withholding on wages.)

That seems easy enough. The confusing part comes when unearned income - money from stock dividends, savings account interest, or capital gains - enters the picture.

The first $600 in unearned income is tax exempt; the second $600 is taxed at the child’s rate (usually 15 percent); anything beyond $1,200 is taxed at the parent’s higher rate until the child turns 14. At that age a person is deemed a full-fledged taxpayer and all unearned income is taxed at his or her own rate.

Tax Form 8615 must be filed for children under 14 if the total unearned income exceeds $1,200 and the child is bumped up to the parents’ tax bracket. Parents can elect to add that income to their own return by filing Form 8814. Most accountants caution against doing this because it would raise the parents’ adjusted gross income and might hurt their ability to take certain deductions or exemptions.

This nuance, known as the kiddie tax, was included in the Tax Reform Act of 1986 to discourage parents from using children as shelters for their own investment income.

It’s important to note that while parents or guardians are legally responsible for filing a dependent child’s tax return, it is the child who will be penalized if a return isn’t filed or if problems arise.

“Compliance is compliance. We don’t care how old you are as long as you pay your taxes,” said Steve Pyreck, an Internal Revenue Service spokesman. “There’s no place on the return where you have to indicate age.”

But tax experts, and even the IRS, say the government isn’t out to seize piggy banks or cut down after-school lawn-mowing businesses.

“The IRS wants to perpetuate an image of being very tough,” said Fred Daily, a San Francisco tax attorney and author of “Stand Up To The IRS.” “But to spend manpower hours to track down a 12-year-old who owes $47 for a return that wasn’t filed, they’re not going to do that.”

Daily said that in the nearly three decades he’s been in the tax field, he’s never heard of a child hauled away to Tax Court or even audited in person.

He said the returns of children usually don’t have items like large business expenses or charitable contributions that attract audits.