How to Follow 8615 Instructions for Filing Taxes

Tax rules can be complicated, especially when they apply to a child’s unearned income. The IRS uses Form 8615 to determine whether a portion of a child’s investment and other passive income should be taxed at their parent’s rate rather than the child’s lower tax bracket. This rule, known as the “kiddie tax,” prevents families from shifting income to children to take advantage of lower tax rates.

Understanding how to properly complete Form 8615 is important to avoid errors that could lead to penalties or an unexpected tax bill.

Who Must File

A child must file Form 8615 if their unearned income exceeds $2,600 for the 2024 tax year. Any amount above this threshold may be taxed at their parent’s rate. This rule applies even if the child is not claimed as a dependent.

Age is another factor. The form is required if the child is under 18 at the end of the tax year, or if they are 18 and their unearned income exceeds half of their financial support. Full-time students between 19 and 23 who rely on parental support must also file. If a child is married and files a joint return, Form 8615 does not apply.

Since the tax is based on the parent’s rate, the child must provide details about their parent’s taxable income. If the parents file jointly, their combined income is used. If they are divorced, the custodial parent’s income is typically used.

Types of Unearned Income

Unearned income includes earnings that do not come from wages or self-employment. For children subject to the kiddie tax, this typically includes interest, dividends, and capital gains.

Interest

Interest income comes from savings accounts, certificates of deposit (CDs), bonds, and other investments. If total interest earned exceeds $10 in a year, financial institutions issue Form 1099-INT.

Interest is fully taxable in the year it is received. Some interest, such as municipal bond interest, is tax-exempt federally but may be taxable at the state level.

U.S. savings bonds, such as Series EE or Series I bonds, allow tax deferral until redemption. However, if the child elects to report interest annually, it must be included in taxable income each year.

Dividends

Dividends are payments from corporations to shareholders and are reported on Form 1099-DIV. They are classified as either ordinary or qualified, each with different tax treatments.

Ordinary dividends are taxed as regular income. Qualified dividends receive lower capital gains tax rates—0%, 15%, or 20%, depending on taxable income. To qualify, the stock must be held for more than 60 days within a 121-day period surrounding the ex-dividend date.

Reinvested dividends, such as those in a dividend reinvestment plan (DRIP), are taxable in the year they are paid, even if the child does not receive the cash.

Capital Gains

Capital gains occur when an asset, such as stocks, mutual funds, or real estate, is sold for more than its purchase price. The tax treatment depends on how long the asset was held.

Short-term capital gains, from assets held for one year or less, are taxed as ordinary income. Long-term capital gains, from assets held for more than a year, are taxed at preferential rates of 0%, 15%, or 20%, depending on taxable income.

Capital gains distributions from mutual funds are reported on Form 1099-DIV and must be included in taxable income, even if reinvested. Losses from investments can offset gains, reducing taxable income. If losses exceed gains, up to $3,000 can be deducted against other income, with excess losses carried forward to future years.

Computing the Kiddie Tax

If a child’s unearned income surpasses $2,600, the kiddie tax applies. The first $1,300 is tax-free due to the standard deduction for dependents, and the next $1,300 is taxed at the child’s rate. Any amount above $2,600 is taxed at the parent’s marginal rate.

To determine tax liability, the child’s taxable unearned income is combined with the parent’s, and the highest tax bracket is applied. If multiple children in a household are subject to the kiddie tax, the tax is divided proportionally based on their respective unearned income.

For families in higher tax brackets, the kiddie tax can significantly increase the tax bill. If a parent is in the 35% tax bracket, any unearned income above the threshold is taxed at this rate instead of the child’s lower bracket, which could be as low as 10%. Families may consider tax-efficient investment strategies, such as municipal bonds or growth-focused assets that minimize taxable distributions.

Filing Form 8615

Completing Form 8615 requires accuracy to avoid miscalculations or IRS scrutiny. The form must be attached to the child’s tax return and relies on information from both the child’s and parent’s filings.

The parent’s return determines the applicable tax rate. If multiple children have investment income subject to the kiddie tax, their combined unearned income must be considered. The IRS requires tax allocation among siblings based on their earnings. Misallocating this amount could lead to overpayment or underpayment, resulting in additional tax assessments or penalties.