What should I know when electing to report my child's investment income on my tax return?

If you elect to report your child's income on your return, you cannot take certain deductions that your child could take on his or her own return such as:

• Additional standard deduction of $2,000 if the child is blind,
• Penalty on early withdrawal of child's savings, and
• Itemized deductions such as the child's investment expenses or charitable contributions.

If you elect to report your child's income on you return, your AGI will be higher and this may reduce some of these deductions or credits on your return:

• IRA contribution deduction
• Student loan interest deduction
• Itemized deductions for medical expenses and casualty and theft losses
• Credit for Child and Dependent Care Expenses (Child Care Credit)
• Child Tax Credit
• Education tax credits
• Earned Income Credit

Additionally, there are other tax ramifications you should consider:

• Underpayment Penalty. If you include your child's income on your return, it's possible you didn't have enough tax withheld (or pay enough estimated tax payments) to cover the tax you owe. This can result in an underpayment penalty.
• Alternative minimum tax (AMT). If your child received tax-exempt interest (or exempt-interest dividends paid by a REIC) from private activity bonds, you must take this into account in determining if you owe the AMT.
• Net Investment Income Tax. For the purpose of figuring your Net Investment Income Tax liability (Form 8960), the child's income will be included in your modified adjusted gross income.
• Investment interest expense. Your child's income (other than qualified dividends, Alaska Permanent Fund dividends, and capital gain distributions) that you report on your return is considered to be your investment income for purposes of figuring your investment interest expense deduction.