Looking for the best way to deal with this, if it matters. We have investments in our childrens names for college. This year both our son's investments had capital gains and dividends that went over $1700, according to turbo-tax this means they must pay according to my tax rate. So my question is, since it is now being taxed at the family rate, does it make sense to just claim it on my taxes? If so, what is that form?
Are the investments in a 529 plan or Coverdell account? If you're saving for college it is definately something you want to think about. They grow tax-free like a retirement account. If they aren't in one of those accounts then you will have to pay taxes. Because the accounts are in the children's names you've triggered the "kiddie tax." The reason for the tax is because the IRS saw too many people were transfering assets to children because they had a lower tax bracket. Here's where it gets complicated. The first $700 of unearned income is not taxable. Between $700 and $1400 is taxed at the child's tax rate, which often is 15%. Then the rest is at the parents rate. File form 8814 if you want to include the tax on your return. But you can only do that if the income is only interest or dividend related (not capital gains from stock/bond sales). Otherwise file form 8615 to have your children file their own return.
thanks! Turbo tax walked me through form 8615, the issue I had, which looks unavoidable at this point, is the income is both dividends and capital gains, and when 8615 was filled out it went over $1700 per kid which triggered it up to a higher tax rate, so the tax owed jumped up dramatically. Looks like its the price for having the investments managed and grow!