Who Meets Certain Children Age 18 Through 23 Conditions for Form 8615?
Understand the eligibility criteria for children aged 18 to 23 under Form 8615, including income types, filing thresholds, and potential tax implications.
The IRS uses Form 8615 to determine whether a child’s unearned income should be taxed at their parents’ rate. This rule prevents families from shifting income to take advantage of lower tax brackets.
Age Limits for Filing Criteria
The IRS applies age restrictions when determining if a child’s unearned income is subject to their parents’ tax rate under Form 8615. This typically affects individuals under 18 but can also apply to full-time students between 18 and 23. A full-time student is enrolled in an educational institution for at least five months of the tax year.
If an individual is 18 or older and meets the definition of a full-time student, they may need to file Form 8615 if their unearned income exceeds the annual threshold. Once they turn 24, the form no longer applies, regardless of student status.
Dependency status is also a factor. If a person provides more than half of their financial support—including housing, food, tuition, and transportation—they are not considered a dependent and are exempt from Form 8615. Students between 18 and 23 who rely on parental support are more likely to be subject to this rule.
Earned vs. Unearned Income
The IRS distinguishes between earned and unearned income for tax purposes. Earned income comes from wages, salaries, tips, and self-employment earnings and is taxed under standard income tax brackets. Individuals with earned income may qualify for deductions such as the standard deduction or the Earned Income Tax Credit.
Unearned income includes interest, dividends, capital gains, rental income, and distributions from trusts. Because this income is passive, it is taxed differently. Under Form 8615, if a dependent child’s unearned income exceeds $2,600 in 2024, it may be taxed at their parents’ marginal tax rate.
Long-term capital gains and qualified dividends are taxed at preferential rates—0%, 15%, or 20%, depending on income. However, when subject to the kiddie tax, these rates are based on the parents’ income, which can lead to a higher tax liability than if the child were taxed at their own rates.
Dependent Tax Filing Thresholds
The IRS sets thresholds to determine when a dependent must file a tax return. For 2024, a dependent must file if their total income exceeds the greater of $1,250 or their earned income plus $400, up to the standard deduction for a single filer ($14,600). If unearned income alone surpasses $1,250, a return is required even if total income is below the standard deduction.
These requirements are relevant for minors with investment accounts, such as custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). If these accounts generate significant interest, dividends, or capital gains, the child may need to file a return even without earned income. Tax-exempt interest, such as that from municipal bonds, does not count toward taxable income but must still be reported if a return is required.
Noncompliance Ramifications
Failing to report income subject to Form 8615 can lead to financial and legal consequences. If a dependent does not file a required tax return or misreports unearned income, the IRS may assess penalties for failure to file, failure to pay, and underpayment of estimated taxes. The failure-to-file penalty is 5% of the unpaid tax per month, up to 25%, while the failure-to-pay penalty accrues at 0.5% per month. If underreporting is intentional, accuracy-related penalties of 20% of the understated tax may also apply under Internal Revenue Code 6662.
Unpaid taxes accumulate interest, calculated at the federal short-term rate plus 3%, compounded daily. If the IRS detects discrepancies through information returns such as Form 1099-DIV or 1099-INT, they may issue a CP2000 notice proposing additional tax. If left unresolved, this could lead to audits.