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2001 Tax Help Archives |
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Tax Prep Help > 2001 > Publications > Publication 929
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Investment income defined. Investment income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest, dividends, capital gains, the taxable part of social security and pension payments, and certain distributions from trusts. Investment income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Nontaxable income. For this purpose, investment income includes only amounts the child must include in total income. Nontaxable investment income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Capital loss. A child's capital losses are taken into account in figuring the child's investment income. Capital losses are first applied against capital gains. If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other investment income. Any difference over $3,000 is carried to the next year. Income from property received as a gift. A child's investment income includes all income produced by property belonging to the child. This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. A child's investment income includes income produced by property given as a gift to the child. This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Example. Amanda Black, age 13, received the following income.
The dividends were on stock given to her by her grandparents. Amanda's investment income is $1,900. This is the total of the dividends ($600), taxable interest ($1,200), and capital gains reduced by capital losses ($300 - $200 = $100). Her wages are earned (not investment) income because they are received for work actually done. Her tax-exempt interest is not included because it is nontaxable. Trust income. If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other investment income from the trust are investment income to the child. Adjustment to income. In figuring the amount to enter on line 1, the child's investment income is reduced by any penalty on the early withdrawal of savings. Line 2 (Deductions) If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $1,500 on line 2. If the child does itemize deductions, enter on line 2 the larger of:
Directly connected. Itemized deductions are directly connected with the production of investment income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Only the amount greater than 2% of the child's adjusted gross income can be deducted. See Publication 529, Miscellaneous Deductions, for more information. Example 1. Roger, age 12, has investment income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with his investment income. His adjusted gross income is $8,000, which is entered on line 1. Line 2 is $1,500 because that is more than the sum of $750 and his directly-connected itemized deductions of $300. Example 2. Eleanor, age 8, has investment income of $16,000 and an early withdrawal penalty of $100. She has no other income. She has itemized deductions of $1,050 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with the production of her investment income. Her adjusted gross income, entered on line 1, is $15,900 ($16,000 - $100). Line 2 is $1,800. This is the larger of:
Line 3 Subtract line 2 from line 1 and enter the result on this line. If zero or less, do not complete the rest of the form. However, you must still attach Form 8615 to the child's tax return. Figure the tax on the child's taxable income in the normal manner. Line 4 (Child's Taxable Income) Enter on line 4 the child's taxable income from Form 1040, line 39; Form 1040A, line 25; or Form 1040NR, line 38. Line 5 (Net Investment Income) A child's net investment income cannot be more than his or her taxable income. Enter on line 5 the smaller of line 3 or line 4 of Form 8615. This is the child's net investment income. If zero or less, do not complete the rest of the form. However, you must still attach Form 8615 to the child's tax return. Figure the tax on the child's taxable income in the normal manner. Illustrated Part II of Form 8615
Step 2. Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II)The next step in completing Form 8615 is to figure a tentative tax on the child's net investment income at the parent's tax rate. The tentative tax is the difference between the tax on the parent's taxable income figured with the child's net investment income (plus the net investment income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. When figuring the tentative tax, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net investment income. For example, do not refigure the medical expense deduction. Figure the tentative tax on lines 6 through 13. For an example, see Illustrated Part II of Form 8615 on the next page. Line 6 (Parent's Taxable Income) Enter on line 6 the amount from the parent's Form 1040, line 39; Form 1040A, line 25; Form 1040EZ, line 6; TeleFile Tax Record, line K; Form 1040NR, line 38; or Form 1040NR-EZ, line 14. If the parent's taxable income is zero or less, enter zero on line 6. Line 7 (Net Investment Income of Other Children) If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Do not include the amount from line 5 of the Form 8615 being completed. Example. Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. The children's net investment income amounts on line 5 of their Forms 8615 are:
Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Other children's information not available. If the net investment income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Estimates and extensions are discussed earlier under Providing Parental Information (Form 8615, Lines A-C). Line 8 (Parent's Taxable Income Plus Children's Net Investment Income) Enter on this line the total of lines 5, 6, and 7. Then compare the amount on this line with the amount listed below for the parent's filing status.
If the amount on this line is not more than the amount listed above, do not complete lines 9 through 16 of Form 8615. Skip the rest of this discussion and the discussions for lines 9 through 16 that follow. If the amount on this line is more than the amount listed above, you must determine the amount of net capital gain it includes, if any, before completing line 9 of Form 8615. Net capital gain on line 8. If neither the child nor the parent nor any other child has net capital gain, the net capital gain on line 8 is zero. Net capital gain is the smaller of the gain, if any, on line 16 of schedule D or the gain, if any, on line 17 of schedule D. If Schedule D is not required, it is the amount on line 13 of Form 1040 or line 10 of Form 1040A. If the child, parent, or any other child has net capital gain, figure the amount of net capital gain included on line 8 by adding together the net capital gain amounts included on lines 5, 6, and 7 of Form 8615. Use the following discussions to find these amounts. Net capital gain on line 5. If the child has a net capital gain, use the appropriate worksheet below to find the amount of net capital gain included on line 5.
Net capital gain on line 6. If the parent has a net capital gain, its full amount is the net capital gain included on line 6. Net capital gain on line 7. The net capital gain included on line 7 is the total of the amounts of net capital gain included on line 5 of the other children's Forms 8615. Find the amount for each other child as explained earlier under Net capital gain on line 5. (Do not attach the other children's Forms 8615 to the child's return.) Line 9 (Tax on Parent's Taxable Income Plus Children's Net Investment Income) Figure the tax on the amount on line 8 using the Tax Table, the Tax Rate Schedules, the Capital Gain Tax Worksheet (in the Form 1040, 1040A, or 1040NR instructions), the Schedule D Tax Worksheet (in the Schedule D instructions) or Schedule D or J (Form 1040), as follows.
Using the Capital Gain Tax Worksheet for line 9 tax. If you use the Capital Gain Tax Worksheet to figure the line 9 tax on Form 8615, complete that worksheet as follows.
Enter the amount from line 15 of the Capital Gain Tax Worksheet on line 9 of Form 8615 and check the box on that line. Do not attach this worksheet to the child's return. Using Schedule D for line 9 tax. Use Schedule D to figure the line 9 tax on Form 8615 if the child, parent, or any other child has qualified 5-year gain or an amount on Form 4952, line 4e, and none of them has unrecaptured section 1250 gain or 28% rate gain. If you must use Schedule D, first complete any Schedule D required for the child, parent, or any other child. Then figure the tax using Part IV of another Schedule D as a worksheet. (Do not attach this worksheet Schedule D to the child's return.) Complete this worksheet Schedule D as follows.
Enter the amount from line 40 of this worksheet Schedule D on line 9 of Form 8615 and check the box on that line. Figuring qualified 5-year gain (line 29). If the child, parent, or any other child has qualified 5-year gain, figure the amount of qualified 5-year gain included in the net capital gain on line 21 of the worksheet Schedule D using the following worksheet.
Using the Schedule D Tax Worksheet for line 9 tax. Use the Schedule D Tax Worksheet in the Schedule D instructions to figure the line 9 tax on Form 8615 if the child, parent, or any other child has unrecaptured section 1250 gain or 28% rate gain. If you must use the Schedule D Tax Worksheet, first complete any Schedule D and any actual Schedule D Tax Worksheet required for the child, parent, or any other child. Then figure the line 9 tax using another Schedule D Tax Worksheet. (Do not attach this Schedule D Tax Worksheet to the child's return.) Complete this Schedule D Tax Worksheet as follows.
Enter the amount from line 37 of this Schedule D Tax Worksheet on line 9 of Form 8615 and check the box on that line. Figuring 28% rate gain (line 6). If the child, parent, or any other child has 28% rate gain, figure the amount of 28% rate gain included in the net capital gain on line 2 using the following worksheet.
Figuring unrecaptured section 1250 gain (line 7). If the child, parent, or any other child has unrecaptured section 1250 gain, figure the amount of unrecaptured section 1250 gain included in the net capital gain on line 2 using the following worksheet.
Figuring qualified 5-year gain (line 17). If the child, parent, or any other child has qualified 5-year gain, figure the amount of qualified 5-year gain included in the net capital gain on line 2 using the following worksheet.
Using Schedule J for line 9 tax. Use Schedule J, Farm Income Averaging, to figure the line 9 tax on Form 8615 if Schedule J is used to figure the tax on the parent's return. First complete the actual Schedule J for the parent, then use another Schedule J as a worksheet to figure the tax to enter on line 9 of Form 8615. (Do not attach this worksheet to the child's return.) Complete this worksheet Schedule J as follows.
Enter the amount from line 22 of this worksheet Schedule J on line 9 of Form 8615 and check the box on that line. Line 10 (Parent's Tax) Enter on line 10 the amount from the parent's Form 1040, line 40; Form 1040A, line 26 (minus any alternative minimum tax); Form 1040EZ, line 10; TeleFile Tax Record, line K; Form 1040NR, line 39; or Form 1040NR-EZ, line 15. Do not include the tax, if any, from Form 4972 or Form 8814. Line 11 (Tentative Tax) Subtract line 10 from line 9 and enter the result on this line. This is the tentative tax. If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Lines 12a and 12b (Dividing the Tentative Tax) If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net investment income. This is done on lines 12a, 12b, and 13. Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. Example. In the earlier example under Line 7 (Net Investment Income of Other Children), Sharon's Form 8615 shows $1,600 on line 7. The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). The decimal on line 12b is .333, figured as follows and rounded to three places.
Line 13 (Child's Share of Tentative Tax) If an amount is entered on line 7, multiply line 11 by the decimal on line 12b and enter the result on line 13. This is the child's share of the tentative tax.
Step 3. Figuring the Child's TaxThe final step in figuring a child's tax using Form 8615 is to determine the larger of:
This is the child's tax. It is figured on lines 14 through 18 of Form 8615. Line 14 (Child's Taxable Income in Excess of Net Investment Income) If lines 4 and 5 of Form 8615 are the same, the child's taxable income does not exceed the child's net investment income. Skip line 14, enter zero on line 15, and go to line 16. Also skip the rest of this discussion and the discussion for line 15 that follows. If lines 4 and 5 are not the same, subtract line 5 from line 4 and enter the result on line 14. Then, before completing line 15, you must determine the amount of net capital gain, if any, included on line 14. Net capital gain on line 14. If the child does not have any net capital gain, the net capital gain included on line 14 is zero. For an explanation of net capital gain, see Net capital gain on line 8 in the earlier discussion for line 8 of Form 8615. If the child has net capital gain, the amount included on line 14 is the amount from line A of the child's completed Line 5 Worksheet minus the amount from the last line of that worksheet. (See the earlier discussion for line 8 of Form 8615.) Line 15 (Tax on Child's Taxable Income in Excess of Net Investment Income). Figure the tax on the amount on line 14 using the Tax Table, the Tax Rate Schedules, the Capital Gain Tax Worksheet, the Schedule D Tax Worksheet, or Schedule D or J (Form 1040), as follows.
This reduction does not apply to the following dependents.
Using the Capital Gain Tax Worksheet for line 15 tax. If you use the Capital Gain Tax Worksheet to figure the line 15 tax on Form 8615, complete that worksheet as follows.
Enter the amount from line 15 of this Capital Gain Tax Worksheet on line 15 of Form 8615 and check the box on that line. Do not attach this worksheet to the child's return. Using Schedule D for line 15 tax. Use Part IV of Schedule D to figure the line 15 tax on Form 8615 if the child has qualified 5-year gain or an amount on Form 4952, line 4e, and no unrecaptured section 1250 gain or 28% rate gain. If you must use Schedule D, first complete any actual Schedule D required for the child. Then figure the line 15 tax using Part IV of another Schedule D as a worksheet. (Do not attach this worksheet Schedule D to the child's return.) Complete this worksheet Schedule D as follows.
Enter the amount from line 40 of this worksheet Schedule D on line 15 of Form 8615. Using the Schedule D Tax Worksheet for line 15 tax. Use the Schedule D Tax Worksheet in the Schedule D instructions to figure the line 15 tax on Form 8615 if the child has unrecaptured section 1250 gain or 28% rate gain. If you must use the Schedule D Tax Worksheet, first complete any Schedule D and any actual Schedule D Tax Worksheet required for the child. Then figure the line 15 tax using another Schedule D Tax Worksheet. (Do not attach thisSchedule D Tax Worksheet to the child's return.) Complete this Schedule D Tax Worksheet as follows.
Enter the amount from line 37 of this Schedule D Tax Worksheet on line 15 of Form 8615 and check the box on that line. Using Schedule J for line 15 tax. If Schedule J applies, use it as a worksheet to figure the tax to enter on line 15 of Form 8615. On line 1 of this worksheet, enter the amount from line 14 of Form 8615. Complete lines 2 through 22 following the worksheet instructions. Use the child's filing status to complete lines 4, 8, 12, and 16. (Before completing line 4, see the caution, Tax computation for certain dependents, earlier.) Enter the amount from line 22 of this worksheet Schedule J on line 15 of Form 8615 and check the box on that line. Do not attach this worksheet to the child's return. Line 16 Combined Tax Add lines 13 and 15 and enter the total on line 16. This is the child's tax figured at the parent's rate on net investment income and the child's rate on other income. Line 17 (Tax at Child's Rate) Figure the tax on line 4 (the child's taxable income). Use the Tax Table, the Tax Rate Schedules, the Capital Gain Tax Worksheet, the Schedule D Tax Worksheet, or the child's actual Schedule D or J, whichever applies. (Before completing line 17, see the caution, Tax computation for certain dependents, earlier.) Enter the tax amount on line 17. If it is from the Capital Gain Tax Worksheet, the Schedule D Tax Worksheet, Schedule D, or Schedule J, check the box on that line. Line 18 (Tax) Enter on line 18 the larger of line 16 or line 17. Also enter this amount on the child's Form 1040, line 40; Form 1040A, line 26; or Form 1040NR, line 39. This is the child's tax.
Alternative Minimum TaxA child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. These items include accelerated depreciation and certain tax-exempt interest income. The AMT may also apply if the child has passive activity losses or certain distributions from estates or trusts. For more information on who is liable for AMT and how to figure it, get Form 6251. Limit on exemption amount. Ordinarily, single people can subtract a $35,750 exemption amount from their AMT taxable income. However, a child who files Form 8615 has a limited exemption amount. The child's exemption amount for 2001 is limited to the child's earned income plus $5,350. Figure the child's allowable exemption amount on the worksheet in the instructions for line 22 of Form 6251.
Illustrated ExampleThis example shows how to fill out Forms 8615 and 1040A for Sara Brown. It also shows how to use the Capital Gain Tax Worksheet in the Form 1040A instructions to figure Sara's tax. John and Laura Brown have one child, Sara. She is 13 and has $2,100 taxable interest and dividend income, $700 capital gain distributions, and $1,550 earned income. She does not itemize deductions and did not receive an advance payment of her 2001 taxes during 2001. John and Laura file a joint return with John's name and social security number listed first. They claim three exemptions, including an exemption for Sara, on their return. Because she is under age 14 and has more than $1,500 investment income, part of her income may be subject to tax at her parents' rate. A completed Form 8615 must be attached to her return. Sara's father, John, fills out Sara's return. He completes her Form 1040A through line 25, then begins completing her Form 8615. John enters his name and social security number on Sara's Form 8615 because his name and number are listed first on the joint return he and Laura are filing. He checks the box for married filing jointly. He enters Sara's investment income, $2,800, on line 1. Sara does not itemize deductions, so John enters $1,500 on line 2. He enters $1,300 ($2,800 - $1,500) on line 3. Sara's taxable income, as shown on line 25 of her Form 1040A, is $2,550. This is her total income ($4,350) minus her standard deduction ($1,800). Her standard deduction is limited to the amount of her earned income plus $250. John enters $2,550 on line 4. John compares lines 3 and 4 and enters the smaller amount, $1,300, on line 5. John enters $48,000 on line 6. This is the taxable income from line 39 of their joint Form 1040 return. Sara is an only child, so line 7 is blank. He adds line 5 ($1,300), line 6 ($48,000), and line 7 (blank) and enters $49,300 on line 8. Because Sara's capital gain distributions are included on line 5, John uses Line 5 Worksheet #1 (in the discussion for line 8, earlier) to figure out that $325 net capital gain is included on line 5. He completes that worksheet as follows.
Therefore, line 8 of Sara's Form 8615 also includes net capital gain of $325. John uses the Capital Gain Tax Worksheet (in the Form 1040A instructions) and follows the instructions under Using the Capital Gain Tax Worksheet for line 9 tax, earlier, to figure the $7,883 tax to enter on line 9 of Sara's Form 8615. He completes that worksheet as shown on Filled-in Capital Gain Tax Worksheet #1. He enters the tax from his and Laura's Form 1040 ($7,557) on line 10 of Sara's Form 8615, subtracts that amount from the $7,883 on line 9, and enters the $326 remainder on line 11. Because line 7 is blank, John skips lines 12a and 12b and enters $326 on line 13. John subtracts line 5 ($1,300) from line 4 ($2,550) and enters the result, $1,250 on line 14. Using the instructions for line 14 earlier, John subtracts the net capital gain included on line 5 ($325) from Sara's net capital gain ($700) to figure the $375 net capital gain included on line 14. He uses another Capital Gain Tax Worksheet and follows the instructions under Using the Capital Gain Tax Worksheet for line 15 tax, earlier, to figure the $126 tax to enter on Form 8615, line 15. He completes that worksheet as shown on Filled-in Capital Gain Tax Worksheet #2. John adds lines 13 and 15 of Form 8615 and enters the sum, $452, on line 16. Then he uses another Capital Gain Tax Worksheet to figure the $256 tax on Sara's $2,550 taxable income to enter on Form 8615, line 17. He completes that worksheet as shown on Filled-in Capital Gain Tax Worksheet #3. Finally, John compares lines 16 and 17 and enters the larger amount, $452, on line 18 of Sara's Form 8615. He also enters that amount on line 26 of Sara's Form 1040A. John also completes Schedule 1, Form 1040A (not shown) for Sara. Form 1040A, page 1, for Sara L. Brown Form 1040A, page 2, for Sara L. Brown Filled-in Capital Gain Tax Worksheet #1 (showing 7,883) Filled-in Capital Gain Tax Worksheet #2 (showing 126) Filled-in Capital Gain Tax Worksheet #3 (showing 256) Publication Index | 2001 Tax Help Archives | Tax Help Archives | Home © 2004, UncleFed.com
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An extension of time to file is not an extension of time to pay.
You must make an accurate estimate of the tax for 2001. If you do not
pay the full amount due by the regular due date, the child will owe
interest and may also be charged penalties. See Form 4868 and its
instructions.
You should also consider getting an extension of time to file the
child's return, because there may be a delay in getting the requested
information.
However, use the following worksheet if the child has excluded any
foreign earned income or deducted a loss from self-employment or a net
operating loss from another year.
