A federal income tax return usually must be filed for a dependent child whose income includes investment income, such as interest and dividends, and totals more than $700. If the dependent child has no investment income, a return must be filed if the child has income of more than $4,250. This discussion explains two special rules affecting the tax on certain investment income of a child under age 14. These special rules affect children under 14 whether or not they are claimed as dependents.

Under the first special rule, you may be able to avoid having to file a tax return for your child by including the child's income on your tax return. You can choose to do this if all of the following conditions are met:

1. Your child was under age 14 on January 1, 1999,
2. Your child had income only from interest and dividends, including Alaska Permanent Fund dividends and capital gain distributions,
3. The interest and dividend income was less than $7,000,
4. No estimated tax payments were made for 1998 and no1997 tax overpayment was applied to 1998 under your child's name and social security number,
5. No federal income tax was withheld from your child's income under backup withholding; and
6. Your child is required to file a return for 1998 unless you make this election.

If you do not file a joint return with the child's other parent, get Publication 929 to find out which parent's return may include the child's income.

To make this choice, attach Form 8814, Parent's Election to Report Child's Interest and Dividends, to your Form 1040.

The second special rule may apply if an income tax return is filed for the child. Under this rule, part of the child's investment income may be taxed at the parent's rate for 1998 if:

1. The child was under age 14 on January 1, 1999,
2. The child's investment income for 1998 was more than $1,400; and
3. The child is required to file a tax return for 1998.

The child's tax is figured on Form 8615, Tax for Children Under Age 14 Who Have Investment Income of More Than $1,400. This form must be attached to the child's tax return.

For more information on this topic, see Publication 929, Tax Rules for Children and Dependents. Publications can be downloaded from this site, or ordered by calling 1-800-829-3676.

The publication is necessary for completing the Form 8615 if the child has capital gains.

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