Finance Questions

Archive for the ‘Kiddie Tax’ Category

How is a child's capital losses treated for tax purposes?

Any capital losses in an UGMA / UTMA account belong to the child, not the parents. The parents cannot report the capital losses on their tax return or use the losses to offset their own capital gains.
Generally, if the child's has ordinary income of $3,800 or more, the child will be able to use capital losses (up to a maximum of $3,000) to offset this income. Capital losses in excess of $3,000 will be carried over the next year.
Figuring a child's capital loss carryover:

The amount the child's capital loss carryover is the amount of the child's total net capital loss that is more than the lesser of:

1. The child's allowable capital loss deduction for the year, or
2. The child's taxable income increased by the child's allowable capital loss deduction for the year.

If deductions are more than income for the tax year, use your negative taxable income in computing the amount in item (2).
Note: If the child has a capital loss carryover, it is recommended that a return be filed even if no return is required to be filed.
Example: For 2005, a child had $1,000 of interest income and a $5,000 capital loss from the sale of stock. The child's taxable income is ($2,800) computed as follows:

To figure any capital loss carryover to 2005 use the Capital Loss Carryover Worksheet in the 2004 instructions for Schedule D. To figure the carryover now, see IRS Publication 550, Investment Income and Expenses.

When is a dependent child required to file a federal income tax return?

A dependent child must file a tax return if any one of the following applies: 

• Unearned income was more than $850 (for 2006) or
• Earned income was more than $5,150 ($4,850 previously) or
• Gross income (total unearned and earned income) was more than the larger of:
  1. $850 ( for 2006) or
  2. Earned income was more than $5,150 ($4,850 previously) plus $300.

A dependent child that has gross income (unearned plus earned income) of $850 (for 2006) or less will not be taxed on that amount and does not have to file a tax return.

Who is responsible for filing the dependent child 's tax return and paying the tax?

If a dependent child cannot file his or her own return for any reason, such as age, the child's parent or guardian is responsible for filing a return on his or her behalf. If the child does not pay the tax due on this income, the parent may be liable for the tax.
A parent may take money out of the child's UGMA / UTMA to pay the child's tax liability. If the parent pays the tax out of the parent's assets, the payment is considered an additional gift to the child.