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Taxact online Publication 929 - Main Content Table of Contents Part 1. Taxact online Rules for All Dependents Filing RequirementsEarned Income Only Unearned Income Only Both Earned and Unearned Income Other Filing Requirements Should a Return Be Filed Even If Not Required? Responsibility for Child's ReturnThird party designee. Taxact online Designated as representative. Taxact online IRS notice. Taxact online Standard DeductionStandard Deduction of Zero Dependent's Own Exemption Withholding From WagesExceptions. Taxact online Part 2. Taxact online Tax on Unearned Income of Certain ChildrenWhich Parent's Return To Use Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, Lines A–C) Step 1. Taxact online Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Taxact online Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Taxact online Figuring the Child's Tax (Form 8615, Part III) Alternative Minimum Tax Illustrated Example Part 1. Taxact online Rules for All Dependents This part of the publication discusses the filing requirements for dependents, who is responsible for a child's return, how to figure a dependent's standard deduction and exemption (if any), and whether a dependent can claim exemption from federal income tax withholding. Taxact online Filing Requirements Whether a dependent has to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind. Taxact online A dependent may have to file a return even if his or her income is less than the amount that would normally require a return. Taxact online See Other Filing Requirements, later. Taxact online The following sections apply to dependents with: Earned income only, Unearned income only, and Both earned and unearned income. Taxact online  To find out whether a dependent must file, read the section that applies, or use Table 1. Taxact online Earned Income Only A dependent whose gross income is only earned income must file a return if the gross income is more than the amount listed in the following table. Taxact online Marital Status Amount Single   Under 65 and not blind $6,100 Either 65 or older or blind $7,600 65 or older and blind $9,100 Married*   Under 65 and not blind $6,100 Either 65 or older or blind $7,300 65 or older and blind $8,500 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Taxact online Example. Taxact online William is 16. Taxact online His mother claims an exemption for him on her income tax return. Taxact online He worked part time on weekends during the school year and full time during the summer. Taxact online He earned $7,000 in wages. Taxact online He did not have any unearned income. Taxact online He must file a tax return because he has earned income only and his gross income is more than $6,100. Taxact online If he is blind, he does not have to file a return because his gross income is not more than $7,600. Taxact online Unearned Income Only A dependent whose gross income is only unearned income must file a return if the gross income is more than the amount listed in the following table. Taxact online Marital Status Amount Single   Under 65 and not blind $1,000 Either 65 or older or blind $2,500 65 or older and blind $4,000 Married*   Under 65 and not blind $1,000 Either 65 or older or blind $2,200 65 or older and blind $3,400 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Taxact online Example. Taxact online Sarah is 18 and single. Taxact online Her parents can claim an exemption for her on their income tax return. Taxact online She received $1,970 of taxable interest and dividend income. Taxact online She did not work during the year. Taxact online She must file a tax return because she has unearned income only and her gross income is more than $1,000. Taxact online If she is blind, she does not have to file a return because she has unearned income only and her gross income is not more than $2,500. Taxact online Election to report child's unearned income on parent's return. Taxact online   A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. Taxact online See Parent's Election To Report Child's Interest and Dividends in Part 2. Taxact online If the parent makes this election, the child does not have to file a return. Taxact online Both Earned and Unearned Income A dependent who has both earned and unearned income generally must file a return if the dependent's gross income is more than line 5 of the following worksheet. Taxact online Filing Requirement Worksheet for Most Dependents 1. Taxact online Enter dependent's earned income plus $350     2. Taxact online Minimum amount   $1,000 3. Taxact online Compare lines 1 and 2. Taxact online Enter the larger amount     4. Taxact online Maximum amount   6,100 5. Taxact online Compare lines 3 and 4. Taxact online Enter the smaller amount     6. Taxact online Enter the dependent's gross income. Taxact online If line 6 is more than line 5, the dependent must file an income tax return. Taxact online If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Taxact online       Table 1. Taxact online 2013 Filing Requirements for Dependents If your parent (or someone else) can claim you as a dependent, use this table to see if you must file a return. Taxact online   See the definitions of “dependent,”“earned income,”“unearned income,” and “gross income” in the Glossary. Taxact online   Single dependents—Were you either age 65 or older or blind?     No. Taxact online You must file a return if any of the following apply. Taxact online       Your unearned income was over $1,000. Taxact online Your earned income was over $6,100. Taxact online Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Taxact online         Yes. Taxact online You must file a return if any of the following apply. Taxact online     Your unearned income was over $2,500 ($4,000 if 65 or older and blind), Your earned income was over $7,600 ($9,100 if 65 or older and blind), Your gross income was more than the larger of—       $2,500 ($4,000 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,850 ($3,350 if 65 or older and blind). Taxact online       Married dependents—Were you either age 65 or older or blind?     No. Taxact online You must file a return if any of the following apply. Taxact online       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Taxact online Your unearned income was over $1,000. Taxact online Your earned income was over $6,100. Taxact online Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Taxact online       Yes. Taxact online You must file a return if any of the following apply. Taxact online       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Taxact online Your unearned income was over $2,200 ($3,400 if 65 or older and blind), Your earned income was over $7,300 ($8,500 if 65 or older and blind), Your gross income was more than the larger of—       $2,200 ($3,400 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,550 ($2,750 if 65 or older and blind). Taxact online       Example 1. Taxact online Joe is 20, single, not blind, and a full-time college student. Taxact online He does not provide more than half of his own support, and his parents claim an exemption for him on their income tax return. Taxact online He received $200 taxable interest income and earned $2,750 from a part-time job. Taxact online He does not have to file a tax return because his gross income of $2,950 ($200 interest plus $2,750 in wages) is not more than $3,100, the amount on line 5 of his filled-in Filing Requirement Worksheet for Most Dependents (shown next). Taxact online Filled-in Example 1 Filing Requirement Worksheet  for Most Dependents 1. Taxact online Enter dependent's earned income plus $350   $ 3,100 2. Taxact online Minimum amount   1,000 3. Taxact online Compare lines 1 and 2. Taxact online Enter the larger amount   3,100 4. Taxact online Maximum amount   6,100 5. Taxact online Compare lines 3 and 4. Taxact online Enter the smaller amount   3,100 6. Taxact online Enter the dependent's gross income. Taxact online If line 6 is more than line 5, the dependent must file an income tax return. Taxact online If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Taxact online   $ 2,950   Example 2. Taxact online The facts are the same as in Example 1 except that Joe had $600 taxable interest income. Taxact online He must file a tax return because his gross income of $3,350 ($600 interest plus $2,750 wages) is more than $3,100, the amount on line 5 of his filled-in worksheet (shown next). Taxact online Filled-in Example 2 Filing Requirement Worksheet for Most Dependents 1. Taxact online Enter dependent's earned income plus $350   $ 3,100 2. Taxact online Minimum amount   1,000 3. Taxact online Compare lines 1 and 2. Taxact online Enter the larger amount   3,100 4. Taxact online Maximum amount   6,100 5. Taxact online Compare lines 3 and 4. Taxact online Enter the smaller amount   3,100 6. Taxact online Enter the dependent's gross income. Taxact online If line 6 is more than line 5, the dependent must file an income tax return. Taxact online If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Taxact online   $ 3,350   Age 65 or older or blind. Taxact online A dependent who is age 65 or older or blind must file a return if his or her gross income is more than line 7 of the following worksheet. Taxact online Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Taxact online Enter dependent's earned income plus $350     2. Taxact online Minimum amount   $1,000 3. Taxact online Compare lines 1 and 2. Taxact online Enter the larger amount     4. Taxact online Maximum amount   6,100 5. Taxact online Compare lines 3 and 4. Taxact online Enter the smaller amount     6. Taxact online Enter the amount from the following table that applies to the dependent       Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Taxact online Add lines 5 and 6. Taxact online Enter the total     8. Taxact online Enter the dependent's gross income. Taxact online If line 8 is more than line 7, the dependent must file an income tax return. Taxact online If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more     Example 3. Taxact online The facts are the same as in Example 2 except that Joe is also blind. Taxact online He does not have to file a return because his gross income of $3,350 is not more than $4,600, the amount on line 7 of his filled-in Filing Requirement Worksheet for Dependents Who Are Age 65 or Older or Blind (shown next). Taxact online   Filled-in Example 3 Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Taxact online Enter dependent's earned income plus $350   $3,100 2. Taxact online Minimum amount   1,000 3. Taxact online Compare lines 1 and 2. Taxact online Enter the larger amount   3,100 4. Taxact online Maximum amount   6,100 5. Taxact online Compare lines 3 and 4. Taxact online Enter the smaller amount   3,100 6. Taxact online Enter the amount from the following table that applies to the dependent   1,500   Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Taxact online Add lines 5 and 6. Taxact online Enter the total   4,600 8. Taxact online Enter the dependent's gross income. Taxact online If line 8 is more than line 7, the dependent must file an income tax return. Taxact online If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more   $3,350 Other Filing Requirements Some dependents may have to file a tax return even if their income is less than the amount that would normally require them to file a return. Taxact online A dependent must file a tax return if he or she owes any other taxes, such as: Social security and Medicare taxes on tips not reported to his or her employer or on wages received from an employer who did not withhold these taxes, Uncollected social security and Medicare or railroad retirement taxes on tips reported to his or her employer or on group-term life insurance, Alternative minimum tax, Additional tax on a health savings account from Form 8889, Part III, Recapture taxes, such as the tax from recapture of an education credit, or Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. Taxact online But if the dependent is filing a return only because of this tax, the dependent can file Form 5329 by itself. Taxact online A dependent must also file a tax return if he or she: Had wages of $108. Taxact online 28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes, or Had net earnings from self-employment of at least $400. Taxact online Spouse itemizes. Taxact online   A dependent must file a return if the dependent's spouse itemizes deductions on a separate return and the dependent has $5 or more of gross income (earned and/or unearned). Taxact online Should a Return Be Filed Even If Not Required? Even if a dependent does not meet any of the filing requirements discussed earlier, he or she should file a tax return if either of the following applies. Taxact online Income tax was withheld from his or her income. Taxact online He or she qualifies for the earned income credit, additional child tax credit, health coverage tax credit, or refundable American opportunity education credit. Taxact online See the tax return instructions to find out who qualifies for these credits. Taxact online  By filing a return, the dependent can get a refund. Taxact online Responsibility for Child's Return Generally, a child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return. Taxact online If a child cannot file his or her own return for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. Taxact online Signing the child's return. Taxact online   If the child cannot sign his or her return, a parent or guardian must sign the child's name followed by the words “By (signature), parent (or guardian) for minor child. Taxact online ” Authority of parent or guardian. Taxact online   A parent or guardian who signs a return on a child's behalf can deal with the IRS on all matters connected with the return. Taxact online   In general, a parent or guardian who does not sign the child's return can only provide information concerning the child's return and pay the child's tax. Taxact online That parent or guardian is not entitled to receive information from the IRS or legally bind the child to a tax liability arising from the return. Taxact online Third party designee. Taxact online   A child's parent or guardian who does not sign the child's return may be authorized, as a third party designee, to discuss the processing of the return with the IRS as well as provide information concerning the return. Taxact online The child or the person signing the return on the child's behalf must check the “Yes” box in the “Third Party Designee” area of the return and name the parent or guardian as the designee. Taxact online   If designated, a parent or guardian can respond to certain IRS notices and receive information about the processing of the return and the status of a refund or payment. Taxact online This designation does not authorize the parent or guardian to receive any refund check, bind the child to any tax liability, or otherwise represent the child before the IRS. Taxact online See the return instructions for more information. Taxact online Designated as representative. Taxact online   A parent or guardian who does not sign the child's return may be designated as the child's representative by the child or the person signing the return on the child's behalf. Taxact online Form 2848, Power of Attorney and Declaration of Representative, is used to designate a child's representative. Taxact online See Publication 947, Practice Before the IRS and Power of Attorney, for more information. Taxact online   If designated, a parent or guardian can receive information about the child's return but cannot legally bind the child to a tax liability unless authorized to do so by the law of the state in which the child lives. Taxact online IRS notice. Taxact online   If you or the child receives a notice from the IRS concerning the child's return or tax liability, you should immediately inform the IRS that the notice concerns a child. Taxact online The notice will show who to contact. Taxact online The IRS will try to resolve the matter with the parent(s) or guardian(s) of the child consistent with their authority. Taxact online Child's earnings. Taxact online   For federal income tax purposes, amounts a child earns by performing services are included in the gross income of the child and not the gross income of the parent. Taxact online This is true even if, under state law, the parent has the right to the earnings and may actually have received them. Taxact online If the child does not pay the tax due on this income, the parent may be liable for the tax. Taxact online Child's expenses. Taxact online   Deductions for payments that are made out of a child's earnings are the child's, even if the payments are made by the parent. Taxact online Example. Taxact online You made payments on your child's behalf that are deductible as a business expense and a charitable contribution. Taxact online You made the payments out of your child's earnings. Taxact online These items can be deducted only on the child's return. Taxact online Standard Deduction The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the larger of: $1,000, or The individual's earned income plus $350, but not more than the regular standard deduction (generally $6,100). Taxact online However, the standard deduction may be higher for a dependent who: Is 65 or older, or Is blind. Taxact online Certain dependents cannot claim any standard deduction. Taxact online See Standard Deduction of Zero , later. Taxact online Worksheet 1. Taxact online   Use Worksheet 1 to figure the dependent's standard deduction. Taxact online Worksheet 1. Taxact online Standard Deduction Worksheet for Dependents Use this worksheet only if someone else can claim you (or your spouse, if filing jointly) as a dependent. Taxact online If you were 65 or older and/or blind, check the correct number of boxes below. Taxact online Put the total number of boxes checked in box c and go to line 1. Taxact online a. Taxact online You 65 or older   Blind   b. Taxact online Your spouse, if claiming  spouse's exemption 65 or older   Blind   c. Taxact online Total boxes checked         1. Taxact online Enter your earned income (defined below) plus $350. Taxact online If none, enter -0-. Taxact online 1. Taxact online     2. Taxact online Minimum amount. Taxact online   2. Taxact online $1,000   3. Taxact online Compare lines 1 and 2. Taxact online Enter the larger of the two amounts here. Taxact online 3. Taxact online     4. Taxact online Enter on line 4 the amount shown below for your filing status. Taxact online       Single or Married filing separately—$6,100 Married filing jointly—$12,200 Head of household—$8,950 4. Taxact online     5. Taxact online Standard deduction. Taxact online         a. Taxact online Compare lines 3 and 4. Taxact online Enter the smaller amount here. Taxact online If under 65 and not blind, stop here. Taxact online This is your standard deduction. Taxact online Otherwise, go on to line 5b. Taxact online 5a. Taxact online     b. Taxact online If 65 or older or blind, multiply $1,500 ($1,200 if married) by the number in box c above. Taxact online Enter the result here. Taxact online 5b. Taxact online     c. Taxact online Add lines 5a and 5b. Taxact online This is your standard deduction for 2013. Taxact online 5c. Taxact online     Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Taxact online It also includes any amount received as a scholarship that you must include in income. Taxact online   Example 1. Taxact online Michael is single, age 15, and not blind. Taxact online His parents can claim him as a dependent on their tax return. Taxact online He has taxable interest income of $800 and wages of $150. Taxact online He enters $500 (his earned income plus $350) on line 1 of Worksheet 1. Taxact online On line 3, he enters $1,000, the larger of $500 or $1,000. Taxact online Michael enters $6,100 on line 4. Taxact online On line 5a, he enters $1,000, the smaller of $1,000 or $6,100. Taxact online His standard deduction is $1,000. Taxact online Example 2. Taxact online Judy, a full-time student, is single, age 22, and not blind. Taxact online Her parents can claim her as a dependent on their tax return. Taxact online She has dividend income of $275 and wages of $2,500. Taxact online She enters $2,850 (her earned income plus $350) on line 1 of Worksheet 1. Taxact online On line 3, she enters $2,850, the larger of $2,850 or $1,000. Taxact online She enters $6,100 on line 4. Taxact online On line 5a, she enters $2,850 (the smaller of $2,850 or $6,100) as her standard deduction. Taxact online Example 3. Taxact online Amy, who is single, is claimed as a dependent on her parents' tax return. Taxact online She is 18 years old and blind. Taxact online She has taxable interest income of $1,000 and wages of $2,000. Taxact online She enters $2,350 (her earned income plus $350) on line 1 of Worksheet 1. Taxact online She enters $2,350 (the larger of $2,350 or $1,000) on line 3, $6,100 on line 4, and $2,350 (the smaller of $2,350 or $6,100) on line 5a. Taxact online Because Amy is blind, she checks the box for blindness and enters “1” in box c at the top of Worksheet 1. Taxact online She enters $1,500 (the number in box c times $1,500) on line 5b. Taxact online Her standard deduction on line 5c is $3,850 ($2,350 + $1,500). Taxact online Standard Deduction of Zero The standard deduction for the following dependents is zero. Taxact online A married dependent filing a separate return whose spouse itemizes deductions. Taxact online A dependent who files a return for a period of less than 12 months due to a change in his or her annual accounting period. Taxact online A nonresident or dual-status alien dependent, unless the dependent is married to a U. Taxact online S. Taxact online citizen or resident alien at the end of the year and chooses to be treated as a U. Taxact online S. Taxact online resident for the year. Taxact online See Publication 519, U. Taxact online S. Taxact online Tax Guide for Aliens, for information on making this choice. Taxact online Example. Taxact online Jennifer, who is a dependent of her parents, is entitled to file a joint return with her husband. Taxact online However, her husband elects to file a separate return and itemize his deductions. Taxact online Because he itemizes, Jennifer's standard deduction on her return is zero. Taxact online She can, however, itemize any of her allowable deductions. Taxact online Dependent's Own Exemption A person who can be claimed as a dependent on another taxpayer's return cannot claim his or her own exemption. Taxact online This is true even if the other taxpayer does not actually claim the exemption. Taxact online Example. Taxact online James and Barbara can claim their child, Ben, as a dependent on their return. Taxact online Ben is a college student who works during the summer and must file a tax return. Taxact online Ben cannot claim his own exemption on his return. Taxact online This is true even if James and Barbara do not claim him as a dependent on their return. Taxact online Withholding From Wages Employers generally withhold federal income tax, social security tax, and Medicare tax from an employee's wages. Taxact online If the employee claims exemption from withholding on Form W-4, the employer will not withhold federal income tax. Taxact online The exemption from withholding does not apply to social security and Medicare taxes. Taxact online Conditions for exemption from withholding. Taxact online   An employee can claim exemption from withholding for 2014 only if he or she meets both of the following conditions. Taxact online For 2013, the employee had a right to a refund of all federal income tax withheld because he or she had no tax liability. Taxact online For 2014, the employee expects a refund of all federal income tax withheld because he or she expects to have no tax liability. Taxact online Dependents. Taxact online   An employee who is a dependent ordinarily cannot claim exemption from withholding if both of the following are true. Taxact online The employee's gross income will be more than $1,000, the minimum standard deduction for 2014. Taxact online The employee's unearned income will be more than $350. Taxact online Exceptions. Taxact online   An employee may be able to claim exemption from withholding even if the employee is a dependent, if the employee: Is age 65 or older, Is blind, or Will claim on his or her 2014 tax return: Adjustments to income, Tax credits, or Itemized deductions. Taxact online The above exceptions do not apply to supplemental wages greater than $1,000,000. Taxact online For more information, see Exemption From Withholding in chapter 1 of Publication 505. Taxact online Example. Taxact online Guy is 17 and a student. Taxact online During the summer he works part time at a grocery store. Taxact online He expects to earn about $1,200 this year. Taxact online He also worked at the store last summer and received a refund of all his withheld income tax because he did not have a tax liability. Taxact online The only other income he expects during the year is $375 interest on a savings account. Taxact online He expects that his parents will be able to claim him as a dependent on their tax return. Taxact online He is not blind and will not claim adjustments to income, itemized deductions, a higher standard deduction, or tax credits on his return. Taxact online Guy cannot claim exemption from withholding when he fills out Form W-4 because his parents will be able to claim him as a dependent, his gross income will be more than $1,000 (the minimum standard deduction amount) and his unearned income will be more than $350. Taxact online Claiming exemption from withholding. Taxact online    To claim exemption from withholding, an employee must enter “Exempt” in the space provided on Form W-4, line 7. Taxact online The employee must complete the rest of the form, as explained in the form instructions, and give it to his or her employer. Taxact online Renewing an exemption from withholding. Taxact online   An exemption from withholding is good for only one year. Taxact online An employee must file a new Form W-4 by February 15 each year to continue the exemption. Taxact online Part 2. Taxact online Tax on Unearned Income of Certain Children The two rules that follow may affect the tax on the unearned income of certain children. Taxact online If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Taxact online (See Parent's Election To Report Child's Interest and Dividends , later. Taxact online ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Taxact online (See Tax for Certain Children Who Have Unearned Income , later. Taxact online ) For these rules, the term “child” includes a legally adopted child and a stepchild. Taxact online These rules apply whether or not the child is a dependent. Taxact online These rules do not apply if neither of the child's parents were living at the end of the year. Taxact online Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Taxact online The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Taxact online Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Taxact online Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Taxact online Parents are married. Taxact online   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Taxact online Parents not living together. Taxact online   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Taxact online If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Taxact online   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in Publication 501. Taxact online Parents are divorced. Taxact online   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Taxact online Custodial parent remarried. Taxact online   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Taxact online Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Taxact online Do not use the return of the noncustodial parent. Taxact online   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Taxact online If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Taxact online Parents never married. Taxact online   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Taxact online If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Taxact online Widowed parent remarried. Taxact online   If a widow or widower remarries, the new spouse is treated as the child's other parent. Taxact online The rules explained earlier under Custodial parent remarried apply. Taxact online Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Taxact online If you do, your child will not have to file a return. Taxact online You can make this election only if all the following conditions are met. Taxact online Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Taxact online Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Taxact online The child's gross income was less than $10,000. Taxact online The child is required to file a return unless you make this election. Taxact online The child does not file a joint return for the year. Taxact online No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Taxact online No federal income tax was withheld from your child's income under the backup withholding rules. Taxact online You are the parent whose return must be used when applying the special tax rules for children. Taxact online (See Which Parent's Return To Use , earlier. Taxact online ) These conditions are also shown in Figure 1. Taxact online Certain January 1 birthdays. Taxact online   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Taxact online You cannot make this election for such a child unless the child was a full-time student. Taxact online   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Taxact online You cannot make this election for such a child. Taxact online How to make the election. Taxact online    Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. Taxact online (If you make this election, you cannot file Form 1040A or Form 1040EZ. Taxact online ) Attach a separate Form 8814 for each child for whom you make the election. Taxact online You can make the election for one or more children and not for others. Taxact online Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Taxact online Rate may be higher. Taxact online   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Taxact online This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Taxact online However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Taxact online Deductions you cannot take. Taxact online   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Taxact online The additional standard deduction if the child is blind. Taxact online The deduction for a penalty on an early withdrawal of your child's savings. Taxact online Itemized deductions (such as your child's investment expenses or charitable contributions). Taxact online Figure 1. Taxact online Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Taxact online Figure 1. Taxact online Can You Include Your Child's Income On Your Tax Return? Deductible investment interest. Taxact online   If you use Form 8814, your child's unearned income is considered your unearned income. Taxact online To figure the limit on your deductible investment interest, add the child's unearned income to yours. Taxact online However, if your child received qualified dividends, capital gain distributions, or Alaska Permanent Fund dividends, see chapter 3 of Publication 550 for information about how to figure the limit. Taxact online Alternative minimum tax. Taxact online    If your child received tax-exempt interest (or exempt-interest dividends paid by a regulated investment company) from certain private activity bonds, you must determine if that interest is a tax preference item for alternative minimum tax (AMT) purposes. Taxact online If it is, you must include it with your own tax preference items when figuring your AMT. Taxact online See Form 6251, Alternative Minimum Tax—Individuals, and its instructions for details. Taxact online Reduced deductions or credits. Taxact online   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following. Taxact online Deduction for contributions to a traditional individual retirement arrangement (IRA). Taxact online Deduction for student loan interest. Taxact online Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Taxact online Credit for child and dependent care expenses. Taxact online Child tax credit. Taxact online Education tax credits. Taxact online Earned income credit. Taxact online Penalty for underpayment of estimated tax. Taxact online   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Taxact online If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Taxact online Get Publication 505 for more information. Taxact online Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Taxact online Only the amount over $2,000 is added to your income. Taxact online The amount over $2,000 is shown on Form 8814, line 6. Taxact online Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Taxact online Include the amount from Form 8814, line 12, on Form 1040 or Form 1040NR, line 21. Taxact online If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040 or Form 1040NR, line 21. Taxact online On the dotted line next to line 21, enter “Form 8814” and the total of the Form 8814, line 12 amounts. Taxact online Note. Taxact online The tax on the first $2,000 is figured on Form 8814, Part II. Taxact online See Figuring Additional Tax , later. Taxact online Qualified dividends. Taxact online   Enter on Form 8814, line 2a, any ordinary dividends your child received. Taxact online This amount may include qualified dividends. Taxact online Qualified dividends are those dividends reported on Form 1040, line 9b, or Form 1040NR, line 10b, and are eligible for lower tax rates that apply to a net capital gain. Taxact online For detailed information about qualified dividends, see Publication 550. Taxact online   If your child received qualified dividends, the amount of these dividends that is added to your income must be reported on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Taxact online You do not include these dividends on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Taxact online   Enter the child's qualified dividends on Form 8814, line 2b. Taxact online But do not include this amount on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Taxact online Instead, include the amount from Form 8814, line 9, on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Taxact online (The amount on Form 8814, line 9, may be less than the amount on Form 8814, line 2b, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Taxact online ) Capital gain distributions. Taxact online   Enter on Form 8814, line 3, any capital gain distributions your child received. Taxact online The amount of these distributions that is added to your income must be reported on Schedule D (Form 1040), line 13, or, if you are not required to file Schedule D, on Form 1040, line 13, or Form 1040NR, line 14. Taxact online You do not include it on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Taxact online   Include the amount from Form 8814, line 10, on Schedule D, line 13; Form 1040, line 13; or Form 1040NR, line 14, whichever applies. Taxact online (The amount on Form 8814, line 10, may be less than the amount on Form 8814, line 3, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Taxact online ) Collectibles (28% rate) gain. Taxact online    If any of the child's capital gain distributions are reported on Form 1099-DIV as collectibles (28% rate) gain, you must determine how much to also include on line 4 of the 28% Rate Gain Worksheet, in the instructions for Schedule D, line 18. Taxact online Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Taxact online The numerator is the part of the child's total capital gain distribution that is collectibles (28% rate) gain. Taxact online The denominator is the child's total capital gain distribution. Taxact online Enter the result on line 4 of the 28% Rate Gain Worksheet. Taxact online Unrecaptured section 1250 gain. Taxact online   If any of the child's capital gain distributions are reported on Form 1099-DIV as unrecaptured section 1250 gain, you must determine how much to include on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D, line 19. Taxact online Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Taxact online The numerator is the part of the child's total capital gain distribution that is unrecaptured section 1250 gain. Taxact online The denominator is the child's total capital gain distribution. Taxact online Enter the result on the Unrecaptured Section 1250 Gain Worksheet, line 11. Taxact online Section 1202 gain. Taxact online   If any of the child's capital gain distributions are reported as section 1202 gain (gain on qualified small business stock) on Form 1099-DIV, part or all of that gain may be eligible for the section 1202 exclusion. Taxact online (For information about the exclusion, see chapter 4 of Publication 550. Taxact online ) To figure that part, multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Taxact online The numerator is the part of the child's total capital gain distribution that is section 1202 gain. Taxact online The denominator is the child's total capital gain distribution. Taxact online Your section 1202 exclusion is generally 50% of the result, but may be subject to a limit. Taxact online In some cases, the exclusion is more than 50%. Taxact online See the instructions for Schedule D for details and information on how to report the exclusion amount. Taxact online Example. Taxact online Fred is 6 years old. Taxact online In 2013, he received dividend income of $2,100, which included $1,575 of ordinary dividends and a $525 capital gain distribution from a mutual fund. Taxact online (None of the distributions were reported on Form 1099-DIV as unrecaptured section 1250 gain, section 1202 gain, or collectibles (28% rate) gain. Taxact online ) All of the ordinary dividends are qualified dividends. Taxact online He has no other income and is not subject to backup withholding. Taxact online No estimated tax payments were made under his name and social security number. Taxact online Fred's parents elect to include Fred's income on their tax return instead of filing a return for him. Taxact online They figure the amount to report on Form 1040, lines 9a and 9b, the amount to report on their Schedule D, line 13, and the amount to report on Form 1040, line 21, as follows. Taxact online They leave lines 1a and 1b of Form 8814 blank because Fred does not have any interest income. Taxact online They enter his ordinary dividends of $1,575 on lines 2a and 2b because all of Fred's ordinary dividends are qualified dividends. Taxact online They enter the amount of Fred's capital gain distributions, $525, on line 3. Taxact online Next, they add the amounts on lines 1a, 2a, and 3 and enter the result, $2,100, on line 4. Taxact online They subtract the base amount on line 5, $2,000, from the amount on line 4, $2,100, and enter the result, $100, on line 6. Taxact online This is the total amount from Form 8814 to be reported on their return. Taxact online Next, they figure how much of this amount is qualified dividends and how much is capital gain distributions. Taxact online They divide the amount on line 2b, $1,575, by the amount on line 4, $2,100. Taxact online They enter the result, . Taxact online 75, on line 7. Taxact online They divide the amount on line 3, $525, by the amount on line 4, $2,100. Taxact online They enter the result, . Taxact online 25, on line 8. Taxact online They multiply the amount on line 6, $100, by the decimal on line 7, . Taxact online 75, and enter the result, $75, on line 9. Taxact online They multiply the amount on line 6, $100, by the decimal on line 8, . Taxact online 25, and enter the result, $25, on line 10. Taxact online They include the amount from line 9, $75, on lines 9a and 9b of their Form 1040 and enter “Form 8814 – $75” on the dotted lines next to lines 9a and 9b. Taxact online They include the amount from line 10, $25, on line 13 of their Schedule D (Form 1040) and enter “Form 8814 – $25” on the dotted line next to Schedule D, line 13. Taxact online They enter $100 ($75 + $25) on line 11 and -0- ($100 – $100) on line 12. Taxact online Because the amount on line 12 is -0-, they do not include any amount from Form 8814 on their Form 1040, line 21. Taxact online Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Taxact online This tax is added to the tax figured on your income. Taxact online This additional tax is the smaller of: 10% x (your child's gross income − $1,000), or $100. Taxact online Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44, or Form 1040NR, line 42. Taxact online Check box a on Form 1040, line 44, or Form 1040NR, line 42. Taxact online Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Taxact online If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Taxact online Attach the completed form to the child's Form 1040, Form 1040A, or Form 1040NR. Taxact online When Form 8615 must be filed. Taxact online   Form 8615 must be filed for a child if all of the following statements are true. Taxact online The child's unearned income was more than $2,000. Taxact online The child is required to file a return for 2013. Taxact online The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Taxact online At least one of the child's parents was alive at the end of 2013. Taxact online The child does not file a joint return for 2013. Taxact online These conditions are also shown in Figure 2. Taxact online Certain January 1 birthdays. Taxact online   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Taxact online IF a child was born on. Taxact online . Taxact online . Taxact online THEN, at the end of 2013, the child is considered to be. Taxact online . Taxact online . Taxact online January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Taxact online The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Taxact online  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Taxact online  ***Do not use Form 8615 for this child. Taxact online Figure 2. Taxact online Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Taxact online Figure 2. Taxact online Do You Have To Use Form 8615 To Figure Your Child's Tax? Providing Parental Information (Form 8615, Lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Taxact online (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Taxact online ) On line C, check the box for the parent's filing status. Taxact online See Which Parent's Return To Use, earlier, for information on which parent's return information must be used on Form 8615. Taxact online Parent with different tax year. Taxact online   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Taxact online Example. Taxact online Kimberly must use her mother's tax and taxable income to complete her Form 8615 for calendar year 2013 (January 1 – December 31). Taxact online Kimberly's mother files her tax return on a fiscal year basis (July 1 – June 30). Taxact online Kimberly must use the information on her mother's return for the tax year ending June 30, 2013, to complete her 2013 Form 8615. Taxact online Parent's return information not known timely. Taxact online   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Taxact online   You can use any reasonable estimate. Taxact online This includes using information from last year's return. Taxact online If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Taxact online   When you get the correct information, file an amended return on Form 1040X, Amended U. Taxact online S. Taxact online Individual Income Tax Return. Taxact online Extension of time to file. Taxact online   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Taxact online S. Taxact online Individual Income Tax Return. Taxact online See the instructions for Form 4868 for details. Taxact online    An extension of time to file is not an extension of time to pay. Taxact online You must make an accurate estimate of the tax for 2013. Taxact online 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. Taxact online See Form 4868 and its instructions. Taxact online Parent's return information not available. Taxact online   If a child cannot get the required information about his or her parent's tax return, the child (or the child's legal representative) can request the necessary information from the Internal Revenue Service (IRS). Taxact online How to request. Taxact online   After the end of the tax year, send a signed, written request for the information to the Internal Revenue Service Center where the parent's return will be filed. Taxact online (The IRS cannot process a request received before the end of the tax year. Taxact online )    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. Taxact online   The request must contain all of the following. Taxact online A statement that you are making the request to comply with section 1(g) of the Internal Revenue Code and that you have tried to get the information from the parent. Taxact online Proof of the child's age (for example, a copy of the child's birth certificate). Taxact online Evidence the child has more than $2,000 of unearned income (for example, a copy of the child's prior year tax return or copies of Forms 1099 for the current year). Taxact online The name, address, social security number (if known), and filing status (if known) of the parent whose information is to be shown on Form 8615. Taxact online    A child's legal representative making the request should include a copy of his or her Power of Attorney, such as Form 2848, or proof of legal guardianship. Taxact online Step 1. Taxact online Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Taxact online To do that, use Form 8615, Part I. Taxact online Line 1 (Unearned Income) If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Taxact online Adjusted gross income is shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. Taxact online Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615 must be filed. Taxact online If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Taxact online However, use the following worksheet if: the child has excluded any foreign earned income, deducted a loss from self-employment, or has a net operating loss from another year. Taxact online Alternate Worksheet for Form 8615, Line 1 A. Taxact online Enter the amount from the child's Form 1040, line 22, or Form 1040NR, line 23   B. Taxact online Enter the total of any net loss  from self-employment, any net operating loss deduction, any foreign earned income exclusion, and any foreign housing exclusion from the child's Form 1040 or Form 1040NR. Taxact online Enter this total as a positive number (greater than zero)   C. Taxact online Add line A and line B and  enter the total   D. Taxact online Enter the child's earned income plus any amount from the child's Form 1040, line 30, or the child's Form 1040NR, line 30     Generally, the child's earned income is the total of the amounts reported on Form 1040, lines 7, 12, and 18 (if line 12 or 18 is a loss, use zero) or Form 1040NR, lines 8, 13, and 19 (if line 13 or 19 is a loss, use zero)   E. Taxact online Subtract line D from line C. Taxact online Enter the result here and on Form 8615, line 1   Unearned income defined. Taxact online   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed. Taxact online It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, certain distributions from trusts, and unemployment compensation. Taxact online Unearned 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). Taxact online Nontaxable income. Taxact online   For this purpose, unearned income includes only amounts the child must include in gross income. Taxact online Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Taxact online Capital loss. Taxact online   A child's capital losses are taken into account in figuring the child's unearned income. Taxact online Capital losses are first applied against capital gains. Taxact online 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 unearned income. Taxact online Any difference over $3,000 is carried to the next year. Taxact online Income from property received as a gift. Taxact online   A child's unearned income includes all income produced by property belonging to the child. Taxact online 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. Taxact online   A child's unearned income includes income produced by property given as a gift to the child. Taxact online This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Taxact online Example. Taxact online Amanda Black, age 13, received the following income. Taxact online Dividends—$800 Wages—$2,100 Taxable interest—$1,200 Tax-exempt interest—$100 Capital gains—$300 Capital losses—($200) The dividends were qualified dividends on stock given to her by her grandparents. Taxact online Amanda's unearned income is $2,100. Taxact online This is the total of the dividends ($800), taxable interest ($1,200), and capital gains reduced by capital losses ($300 − $200 = $100). Taxact online Her wages are earned (not unearned) income because they are received for work actually performed. Taxact online Her tax-exempt interest is not included because it is nontaxable. Taxact online Trust income. Taxact online   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Taxact online   However, taxable distributions from a qualified disability trust are considered earned income for the purposes of completing Form 8615. Taxact online See the Form 8615 instructions for details. Taxact online Adjustment to income. Taxact online   In figuring the amount to enter on line 1, the child's unearned income is reduced by any penalty on the early withdrawal of savings. Taxact online Line 2 (Deductions) If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $2,000 on line 2. Taxact online If the child itemizes deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29 (or Schedule A (Form 1040NR), line 15), that are directly connected with the production of the unearned income entered on line 1, or $2,000. Taxact online Directly connected. Taxact online   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Taxact online These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Taxact online    These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Taxact online Only the amount greater than 2% of the child's adjusted gross income can be deducted. Taxact online See Publication 529, Miscellaneous Deductions, for more information. Taxact online Example 1. Taxact online Roger, age 12, has unearned 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 unearned income. Taxact online His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Taxact online Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly-connected itemized deductions of $300. Taxact online Example 2. Taxact online Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Taxact online She has no other income. Taxact online 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 unearned income. Taxact online Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Taxact online The amount on line 2 is $2,050. Taxact online This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Taxact online Line 3 Subtract line 2 from line 1 and enter the result on this line. Taxact online If zero or less, do not complete the rest of the form. Taxact online However, you must still attach Form 8615 to the child's tax return. Taxact online Figure the tax on the child's taxable income in the normal manner. Taxact online Line 4 (Child's Taxable Income) Enter on line 4 the child's taxable income from Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Taxact online Child files Form 2555 or 2555-EZ. Taxact online   If the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) is used to figure the child's tax. Taxact online Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the child's taxable income on Form 8615, line 4. Taxact online Line 5 (Net Unearned Income) A child's net unearned income cannot be more than his or her taxable income. Taxact online Enter on Form 8615, line 5, the smaller of line 3 or line 4. Taxact online This is the child's net unearned income. Taxact online If zero or less, do not complete the rest of the form. Taxact online However, you must still attach Form 8615 to the child's tax return. Taxact online Figure the tax on the child's taxable income in the normal manner. Taxact online Step 2. Taxact online 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 unearned income at the parent's tax rate. Taxact online The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Taxact online When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Taxact online For example, do not refigure the medical expense deduction. Taxact online Figure the tentative tax on Form 8615, lines 6 through 13. Taxact online Line 6 (Parent's Taxable Income) Enter on line 6 the amount from the parent's Form 1040, line 43; Form 1040A, line 27; Form 1040EZ, line 6; Form 1040NR, line 41; or Form 1040NR-EZ, line 14. Taxact online If the parent's taxable income is zero or less, enter zero on line 6. Taxact online Parent files Form 2555 or 2555-EZ. Taxact online   If the parent files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet in the Form 1040 instructions is used to figure the parent's tax. Taxact online Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the parent's taxable income, on line 6 of Form 8615. Taxact online Line 7 (Net Unearned 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. Taxact online Do not include the amount from line 5 of the Form 8615 being completed. Taxact online (The term “other child” means any other child whose Form 8615 uses the tax information of the parent identified on Lines A and B of Form 8615. Taxact online ) Example. Taxact online Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Taxact online The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon—$800 Jerry—$600 Mike—$1,000 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. Taxact online Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Taxact online Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Taxact online Other children's information not available. Taxact online   If the net unearned 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. Taxact online Estimates and extensions are discussed earlier under Providing Parental Information (Form 8615, Lines A–C) . Taxact online Line 8 (Parent's Taxable Income Plus Children's Net Unearned Income) Enter on this line the total of lines 5, 6, and 7. Taxact online You must determine the amount of net capital gain and qualified dividends included on this line before completing Form 8615, line 9. Taxact online Net capital gain. Taxact online   Net capital gain is the smaller of the gain, if any, on Schedule D (Form 1040), line 15, or the gain, if any, on Schedule D, line 16. Taxact online If Schedule D is not required, it is the amount on Form 1040, line 13; Form 1040A, line 10; or Form 1040NR, line 14. Taxact online Qualified dividends. Taxact online   Qualified dividends are those dividends reported on line 9b of Form 1040 or Form 1040A, or line 10b of Form 1040NR. Taxact online Net capital gain and qualified dividends on line 8. Taxact online   If neither the child, nor the parent, nor any other child has net capital gain, the net capital gain on line 8 is zero. Taxact online   If neither the child, nor the parent, nor any other child has qualified dividends, the amount of qualified dividends on line 8 is zero. Taxact online   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. Taxact online   If the child, parent, or any other child has qualified dividends, figure the amount of qualified dividends included on line 8 by adding together the qualified dividend amounts included on lines 5, 6, and 7. Taxact online   Use the instructions for Form 8615, line 8, including the appropriate Line 5 Worksheet, to find these amounts. Taxact online See the instructions for Form 8615 for more details. Taxact online Note. Taxact online The amount of any net capital gain or qualified dividends is not separately reported on line 8. Taxact online It is  needed, however, when figuring the tax on line 9. Taxact online Line 9 (Tax on Parent's Taxable Income Plus Children's Net Unearned Income) Figure the tax on the amount on line 8 using the Tax Table, the Tax Computation Worksheet, the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040, 1040A, or 1040NR instructions), the Schedule D Tax Worksheet (in the Schedule D instructions), or Schedule J (Form 1040), as follows. Taxact online If line 8 does not include any net capital gain or qualified dividends, use the Tax Table or Tax Computation Worksheet to figure this tax. Taxact online But if Schedule J, Income Averaging for Farmers and Fishermen, is used to figure the tax on the parent's return, use it to figure this tax. Taxact online If line 8 includes any net capital gain or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet to figure this tax. Taxact online For details, see the instructions for Form 8615, line 9. Taxact online However, if the child, parent, or any other child has 28% rate gain or unrecaptured section 1250 gain, use the Schedule D Tax Worksheet. Taxact online But if Schedule J is used to figure the tax on the parent's return, use it to figure this tax. Taxact online Child files Form 2555 or 2555-EZ. Taxact online   If line 8 includes any net capital gain or qualified dividends and the child, or any other child filing Form 8615, also files Form 2555 or 2555-EZ, use Using the Schedule D Tax Worksheet for line 9 tax, next, to figure the line 9 tax. Taxact online Using the Schedule D Tax Worksheet for line 9 tax. Taxact online    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. Taxact online 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. Taxact online Then figure the line 9 tax using another Schedule D Tax Worksheet. Taxact online (Do not attach this Schedule D Tax Worksheet to the child's return. Taxact online )   Complete this Schedule D Tax Worksheet as follows. Taxact online On line 1, enter the amount from Form 8615, line 8. Taxact online On line 2, enter the qualified dividends included on Form 8615, line 8. Taxact online (See the earlier discussion for line 8. Taxact online ) On line 3, enter the total of the amounts, if any, on line 4g of all Forms 4952 filed by the child, parent, or any other child. Taxact online On line 4, enter the total of the amounts, if any, on line 4e of all Forms 4952 filed by the child, parent, or any other child. Taxact online If applicable, include instead the smaller amount entered on the dotted line next to line 4e. Taxact online On lines 5 and 6, follow the worksheet instructions. Taxact online On line 7, enter the net capital gain included on Form 8615, line 8. Taxact online (See the earlier discussion for line 8. Taxact online ) On lines 8 through 10, follow the worksheet instructions. Taxact online On line 11, enter zero if neither the child, nor the parent, nor any other child has unrecaptured section 1250 gain (Schedule D, line 19) or 28% rate gain (Schedule D, line 18). Taxact online Otherwise, enter the amount of unrecaptured section 1250 gain and 28% rate gain included in the net capital gain on line 8 of Form 8615. Taxact online Figure these amounts as explained later under Figuring unrecaptured section 1250 gain (line 11) and Figuring 28% rate gain (line 11). Taxact online If the Foreign Earned Income Tax Worksheet was used to figure the parent's tax or the tax of any child, go to step 10 below. Taxact online Otherwise, skip steps 10, 11, and 12 below, and go to step 13. Taxact online Determine whether there is a line 8 capital gain excess as follows. Taxact online Add the amounts on line 2 of all Foreign Earned Income Tax Worksheets completed by the parent or any child for whom Form 8615 is filed. Taxact online (But for each child do not add more than the excess, if any, of the amount on line 5 of the child's Form 8615 over the child's taxable income on Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Taxact online ) Subtract (a) from the amount on line 1 of this Schedule D Tax Worksheet. Taxact online Subtract (b) from the amount on line 10 of this Schedule D Tax Worksheet. Taxact online If the result is more than zero, that amount is the line 8 capital gain excess. Taxact online If the result is zero or less, there is no line 8 capital gain excess. Taxact online If there is no line 8 capital gain excess, skip step 12 below and go to step 13. Taxact online If there is a line 8 capital gain excess, complete a second Schedule D Tax Worksheet as instructed above and in step 13, but in its entirety and with the following additional modifications. Taxact online (These modifications are to be made only for purposes of filling out this additional Schedule D Tax Worksheet. Taxact online ) Reduce the amount you would otherwise enter on line 9 (but not below zero) by the line 8 capital gain excess. Taxact online Reduce the amount you would otherwise enter on line 6 (but not below zero) by any of the line 8 capital gain excess not used in (a) above. Taxact online If the child, parent, or any other child has 28% rate gain, reduce the amount you would otherwise enter on line 8 of Worksheet 1 for Line 11 of the Schedule D Tax Worksheet – 28% Rate Gain (Line 9 Tax), shown later, (but not below zero) by the line 8 capital gain excess, and refigure the amount on line 11 of this Schedule D Tax Worksheet. Taxact online If the child, parent, or any other child has unrecaptured section 1250 gain, reduce the amount you would otherwise enter on line 8 of Worksheet 2 for Line 11 of the Schedule D Tax Worksheet – Unrecaptured Section 1250 Gain (Line 9 Tax) (but not below zero) by the line 8 capital gain excess not used in 12(c), and refigure the amount on line 11 of this Schedule D Tax Worksheet. Taxact online Complete lines 12 through 45 following the worksheet instructions. Taxact online Use the parent's filing status to complete lines 15, 42, and 44. Taxact online Enter the amount from line 45 of this Schedule D Tax Worksheet on Form 8615, line 9, and check the box on that line
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Taxact online 2. Taxact online   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. Taxact online ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. Taxact online In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. Taxact online Those cases are called “abusive tax shelters. Taxact online ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. Taxact online Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . Taxact online Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Taxact online Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. Taxact online They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. Taxact online Despite appearances to the contrary, the taxpayer generally risks little. Taxact online Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. Taxact online Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. Taxact online (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. Taxact online ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. Taxact online This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. Taxact online Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. Taxact online However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. Taxact online Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. Taxact online These provisions include the following. Taxact online Disclosure of reportable transactions. Taxact online   You must disclose information for each reportable transaction in which you participate. Taxact online See Reportable Transaction Disclosure Statement , later. Taxact online   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. Taxact online To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. Taxact online   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. Taxact online They must provide this number to all persons to whom they acted as a material advisor. Taxact online They must provide the number at the time the transaction is entered into. Taxact online If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. Taxact online For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. Taxact online Requirement to maintain list. Taxact online   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. Taxact online The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. Taxact online See Regulations section 301. Taxact online 6112-1 for more information (including what information is required to be included on the list). Taxact online Confidentiality privilege. Taxact online   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. Taxact online Appraisal requirement for donated property. Taxact online   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. Taxact online If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. Taxact online If you file electronically, see Form 8453, U. Taxact online S. Taxact online Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. Taxact online For more information about appraisals, including exceptions, see Publication 561. Taxact online Passive activity loss and credit limits. Taxact online   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. Taxact online For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. Taxact online Interest on penalties. Taxact online   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. Taxact online Accounting method restriction. Taxact online   Tax shelters generally cannot use the cash method of accounting. Taxact online Uniform capitalization rules. Taxact online   The uniform capitalization rules generally apply to producing property or acquiring it for resale. Taxact online Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. Taxact online For more information, see Publication 538. Taxact online Denial of deduction for interest on an underpayment due to a reportable transaction. Taxact online   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. Taxact online This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. Taxact online Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. Taxact online The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. Taxact online Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. Taxact online So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. Taxact online In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. Taxact online The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. Taxact online Investor Reporting You may be required to file a reportable transaction disclosure statement. Taxact online Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. Taxact online Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. Taxact online Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). Taxact online In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. Taxact online  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. Taxact online If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. Taxact online If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. Taxact online See Penalty for failure to disclose a reportable transaction , later under Penalties. Taxact online The following discussion briefly describes reportable transactions. Taxact online For more details, see the Instructions for Form 8886. Taxact online Reportable transaction. Taxact online   A reportable transaction is any of the following. Taxact online A listed transaction. Taxact online A confidential transaction. Taxact online A transaction with contractual protection. Taxact online A loss transaction. Taxact online A transaction of interest entered into after November 1, 2006. Taxact online Note. Taxact online Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. Taxact online Listed transaction. Taxact online   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. Taxact online These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. Taxact online For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. Taxact online irs. Taxact online gov/irb/2009-31_IRB/ar07. Taxact online html. Taxact online Confidential transaction. Taxact online   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. Taxact online A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. Taxact online The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. Taxact online Transaction with contractual protection. Taxact online   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. Taxact online For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. Taxact online irs. Taxact online gov/irb/2007-07_IRB/ar15. Taxact online html. Taxact online Loss transaction. Taxact online   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. Taxact online A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. Taxact online   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. Taxact online For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. Taxact online irs. Taxact online gov/irb/2004-50_IRB/ar11. Taxact online html. Taxact online Transaction of interest. Taxact online   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. Taxact online The IRS has identified the following transactions of interest. Taxact online “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. Taxact online R. Taxact online B. Taxact online 545, available at www. Taxact online irs. Taxact online gov/irb/2007-36_IRB/ar20. Taxact online html. Taxact online Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. Taxact online R. Taxact online B. Taxact online 544, available at www. Taxact online irs. Taxact online gov/irb/2007-36_IRB/ar19. Taxact online html. Taxact online Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. Taxact online R. Taxact online B. Taxact online 1194, available at www. Taxact online irs. Taxact online gov/irb/2008-47_IRB/ar11. Taxact online html. Taxact online Certain transactions involving a U. Taxact online S. Taxact online taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. Taxact online R. Taxact online B. Taxact online 312, available at www. Taxact online irs. Taxact online gov/irb/2009-03_IRB/ar10. Taxact online html. Taxact online   For updates to this list, go to www. Taxact online irs. Taxact online gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. Taxact online Penalties Investing in an abusive tax shelter may lead to substantial expenses. Taxact online First, the promoter generally charges a substantial fee. Taxact online If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. Taxact online You may also be subject to the penalty for failure to pay tax. Taxact online These penalties are explained in the following paragraphs. Taxact online Accuracy-related penalties. Taxact online   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). Taxact online Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. Taxact online Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. Taxact online   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. Taxact online   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). Taxact online Negligence or disregard of rules or regulations. Taxact online   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. Taxact online The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. Taxact online    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. Taxact online It also includes any failure to keep adequate books and records. Taxact online A return position that has a reasonable basis is not negligence. Taxact online   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. Taxact online   The penalty for disregard of rules and regulations can be avoided if all the following are true. Taxact online You keep adequate books and records. Taxact online You have a reasonable basis for your position on the tax issue. Taxact online You make an adequate disclosure of your position. Taxact online Use Form 8275 to make your disclosure and attach it to your return. Taxact online To disclose a position contrary to a regulation, use Form 8275-R. Taxact online Use Form 8886 to disclose a reportable transaction (discussed earlier). Taxact online Substantial understatement of tax. Taxact online   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. Taxact online An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. Taxact online The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. Taxact online   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. Taxact online In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. Taxact online Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. Taxact online   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. Taxact online An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. Taxact online Substantial valuation misstatement. Taxact online   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. Taxact online The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. Taxact online You underpaid your tax by more than $5,000 because of the misstatement. Taxact online You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. Taxact online   You may be assessed a penalty of 40% for a gross valuation misstatement. Taxact online If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. Taxact online The penalty rate is also 40% if the property's correct value or adjusted basis is zero. Taxact online Transaction lacking economic substance. Taxact online   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. Taxact online For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. Taxact online   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. Taxact online   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. Taxact online   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. Taxact online Relevant facts include any facts affecting the tax treatment of the transaction. Taxact online    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. Taxact online Undisclosed foreign financial asset understatement. Taxact online   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. Taxact online An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. Taxact online The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. Taxact online Any foreign business you control, reportable on Form 5471, Information Return of U. Taxact online S. Taxact online Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. Taxact online S. Taxact online Persons With Respect to Certain Foreign Partnerships. Taxact online Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. Taxact online S. Taxact online Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. Taxact online Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. Taxact online    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. Taxact online See the Instructions for Form 8938 for details. Taxact online    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. Taxact online Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxact online Penalty for incorrect appraisals. Taxact online   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. Taxact online For details on the penalty amount and exceptions, see Publication 561. Taxact online Penalty for failure to disclose a reportable transaction. Taxact online   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). Taxact online For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). Taxact online This penalty is in addition to any other penalty that may be imposed. Taxact online   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. Taxact online For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. Taxact online irs. Taxact online gov/irb/2007-09_IRB/ar12. Taxact online html. Taxact online Accuracy-related penalty for a reportable transaction understatement. Taxact online   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. Taxact online This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. Taxact online The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. Taxact online You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. Taxact online The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. Taxact online   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. Taxact online Civil fraud penalty. Taxact online   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. Taxact online Joint return. Taxact online   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. Taxact online Failure to pay tax. Taxact online   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. Taxact online Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. Taxact online Prev  Up  Next   Home   More Online Publications