Children who receive an investment income above a certain amount have to pay tax at the same rate as their parents. This prevents wealthy families from transferring their investments to their children. In the beginning, the ruling applied to children aged 14-years-old and under, however, in 2006 Congress increased the age to 18. Known as “kiddie tax”, students under the age of 24 have been required to pay it since 2008. There is a chance you can avoid having to file a return on behalf on your child, by reporting your child’s income on your own tax return.

Eligibility

In order for you to include your child’s income on your return, your child must receive no other income apart from investment interest and dividends. Alaska Permanent Fund dividends and capital gains distributions also qualify. If your child has any other income, such as capital gain from selling stocks, you will not be able to add your child to your return. If your child’s income is too low for a tax return, you do not include your child's information on your return.

Effects of Adding Your Child to Your Tax Return

If you do decide to add your child’s income to your tax return you still receive the standard child’s deduction of $950. You may also qualify for the child’s rate for the next $950. If your child’s income is more than $1900 then it will be subject to the parent’s tax rate. Consider seeking advice from the IRS before adding your child. You will not necessarily pay less tax because you added your child to your tax return rather than completing a separate one. Ask for clarification on the different rates and thresholds involved. It is also worth remembering that even though your child will be on your return, you still have to fill out your child's information on a separate form.

Loss of Tax Benefits

Filing a separate tax return for your child’s income entitles your child to benefits that are not available if you file his income on your tax return. A separate tax return entitles your child to forfeit interest if your child makes an early withdrawal on a savings account. If your child suffers from a disability, such as blindness, a separate tax return entitles your child to a larger standard deduction. You will also need to remember if your child received capital gains distributions, the tax on his income will be significantly higher.