Form 8615

What Is Form 8615?

Form 8615, "Tax for Certain Children Who Have Unearned Income," is an Internal Revenue Service (IRS) form used to calculate the income tax for dependent children who have substantial unearned income. This form is an essential component of tax and income planning for families, specifically addressing the "kiddie tax" rules. The purpose of Form 8615 is to prevent income shifting, where parents might transfer income-generating assets to their children to take advantage of the child's typically lower tax rates. When a child's unearned income exceeds certain thresholds, Form 8615 ensures that a portion of that income is taxed at the parent's marginal tax rate rather than the child's rate. This form must be attached to the child's personal tax return, generally Form 1040²⁶.

History and Origin

The concept behind Form 8615, widely known as the "kiddie tax," was introduced as part of the Tax Reform Act of 1986. Before this legislation, families with high-income parents could legally reduce their overall tax liability by transferring investment assets to their minor children. The income generated from these assets would then be taxed at the child's lower individual income tax rate. To close this perceived tax loophole, Congress enacted the kiddie tax, requiring a portion of a child's unearned income to be taxed at the parent's rate²⁴, ²⁵.

Initially, the kiddie tax applied to children under 14 years old. Subsequent amendments, including those in 2006 and 2008, expanded its reach to dependents up to age 18, and up to age 23 if they are full-time students and their earned income does not exceed half of their support²³. While the Tax Cuts and Jobs Act of 2017 (TCJA) temporarily changed the rates to those applicable to trusts and estates, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 retroactively reverted the rules to tax unearned income at the parent's marginal rate, effective for the 2020 tax year and beyond²¹, ²².

Key Takeaways

• Form 8615 is used to calculate the "kiddie tax" on a dependent child's unearned income that exceeds a specific threshold.
• The kiddie tax aims to prevent high-income earners from reducing their tax burden by shifting income-producing assets to their children.
• The unearned income subject to this tax includes, but is not limited to, interest income, dividends, and capital gains.
• Form 8615 generally applies to children under 18, or full-time students aged 19-23, whose earned income is less than half of their support.
• A child's earned income, such as wages from a job, is not subject to the kiddie tax.

Formula and Calculation

The calculation on Form 8615 determines how much of a child's unearned income is taxed at the parent's marginal tax rate. For 2024, the first $1,300 of a child's unearned income is generally covered by the child's standard deduction and is tax-free. The next $1,300 of unearned income is taxed at the child's own tax rate. Any unearned income exceeding $2,600 is then taxed at the parent's marginal tax rate¹⁹, ²⁰.

The formula for determining the net unearned income subject to the parent's rate is:

Where:

• Total Unearned Income: Includes income from investments, such as interest, dividends, and capital gains.
• Standard Deduction Threshold: The amount of unearned income that is tax-free for the child (e.g., $1,300 for 2024).
• Child's Taxed Portion: The amount of unearned income taxed at the child's rate (e.g., $1,300 for 2024).

This net unearned income is then added to the parent's taxable income to determine the incremental tax amount, which is then allocated back to the child's return¹⁸.

Interpreting Form 8615

Interpreting Form 8615 involves understanding that it applies when a dependent child's investment income surpasses certain thresholds, indicating that the child is not merely earning small amounts but rather holds significant income-producing assets. The form effectively reallocates a portion of this income to the parents' tax bracket for calculation purposes. It is crucial to determine if a child meets the age and income criteria to require filing Form 8615, as overlooking this could lead to underpayment penalties.

The form also serves as a transparency mechanism for the Internal Revenue Service, ensuring that families are not using children as conduits for tax avoidance. Families often consult with tax professionals or use tax preparation software to accurately complete Form 8615, given its potential complexity, especially when multiple children are involved or when calculating adjusted gross income for parents.

Hypothetical Example

Consider a scenario for the 2024 tax year: Alex, a 16-year-old, has $150 in earned income from a summer job and $5,000 in unearned income from a custodial account inherited from a grandparent. Alex is claimed as a dependent by their parents.

1. Determine Unearned Income Subject to Kiddie Tax: Alex's total unearned income is $5,000.
2. Apply Standard Deduction Threshold: The first $1,300 of unearned income is tax-free.
3. Apply Child's Tax Rate Portion: The next $1,300 of unearned income is taxed at Alex's rate.
4. Calculate Net Unearned Income for Parent's Rate:
   $5,000 (Total Unearned Income) - $1,300 (Tax-Free) - $1,300 (Child's Rate) = $2,400.
   This $2,400 is the net unearned income that will be taxed at the parents' marginal tax rate.

Alex's parents, after completing their own tax return, would then use Form 8615 to calculate the tax on this $2,400 portion based on their marginal rate and combine it with the tax on Alex's other income.

Practical Applications

Form 8615 has significant practical applications primarily in financial planning and tax compliance for families with investment assets. It mandates how certain income from investments held in a child's name is reported and taxed, preventing strategies that exploit lower tax brackets. For example, income from assets held in a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account would typically be subject to kiddie tax rules once it exceeds the annual thresholds.

This form ensures that wealthy families cannot simply shift significant investment income to children to avoid higher parental tax rates. While it adds complexity, it's a necessary tool for the Internal Revenue Service to maintain fairness in the progressive tax system. Taxpayers can find the official Form 8615 and its instructions directly on the IRS website, which provides detailed guidance for its completion¹⁷. Additionally, the IRS Publication 929, "Tax Rules for Children and Dependents," offers comprehensive information regarding filing requirements for children with various types of income.

Limitations and Criticisms

While Form 8615 serves its primary purpose of preventing income shifting, the "kiddie tax" rules have faced some criticism. One notable limitation is the increased complexity it introduces to tax preparation for families. Calculating the tax liability requires coordinating information between the child's and parent's tax returns, which can be challenging, especially when dealing with multiple children or complex investment scenarios¹⁶.

Critics also argue that the kiddie tax can inadvertently affect non-tax-motivated transfers, such as legitimate gifts from grandparents intended to help with college expenses. While 529 plans are explicitly exempt from the kiddie tax, other custodial account earnings are not, which can impact educational savings strategies¹⁵. Furthermore, some argue that the tax may discourage long-term savings for children, as the tax implications can diminish the benefits of investing early¹⁴. The shifting age limits over the years have also contributed to a perception of inconsistency and added to the administrative burden for taxpayers¹³.

Form 8615 vs. Kiddie Tax

The terms "Form 8615" and "kiddie tax" are closely related but refer to different aspects of the same tax regulation. The kiddie tax is the actual tax provision or rule within the Internal Revenue Code that dictates how a portion of a child's unearned income is taxed at the parent's marginal income tax rate¹². It is a conceptual framework designed to prevent income shifting.

Form 8615, on the other hand, is the specific IRS tax form used to officially calculate and report the amount of tax due under the kiddie tax rules¹⁰, ¹¹. In essence, the kiddie tax is the legal principle, and Form 8615 is the administrative tool taxpayers use to comply with that principle. A child subject to the kiddie tax must file Form 8615 with their tax return to ensure proper calculation and payment of the tax on their unearned income⁹.

FAQs

What types of income are considered "unearned income" for Form 8615?

Unearned income typically includes passive income sources such as taxable interest income, ordinary dividends, capital gains distributions, rents, royalties, and income from trusts. It generally does not include wages or other income from active employment, which is considered earned income.⁷, ⁸

Who needs to file Form 8615?

Form 8615 must be filed for a child if they had more than $2,600 (for 2024) in unearned income, are required to file a tax return, do not file a joint return, have at least one living parent, and meet certain age criteria (generally under 18, or 18-23 if a full-time student whose earned income is less than half their support).⁵, ⁶

Can parents elect to report their child's income without filing Form 8615?

Yes, in certain situations, parents can elect to include their child's interest and dividend income on their own tax return by filing Form 8814, "Parents' Election To Report Child's Interest and Dividends." However, this option is only available if the child's unearned income consists solely of interest and dividends, is below a certain threshold (e.g., less than $13,000 for 2024), and no estimated tax payments were made in the child's name. If the unearned income is too high, or includes other types of income like capital gains, Form 8615 is required.³, ⁴

What are the thresholds for the kiddie tax?

For 2024, the first $1,300 of a child's unearned income is generally tax-free due to the standard deduction. The next $1,300 is taxed at the child's own tax rates. Any unearned income above $2,600 is subject to the parents' marginal tax rate. These thresholds are adjusted annually for inflation.¹, ²