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Teaching Your Child about Investing? Find out How the IRS Will Treat Your Child’s Investment Income


I am in the process of writing a book about financial literacy which focuses on children.  I am passionate about this topic because I have witnessed way to many young people (myself included) who have grown into young adulthood and then adulthood without a good understanding of how money works for them and against them. 


We all imagine that we know what to do with money when it is in abundance: I have fantasized about owning an Audi TT, building my family home to my personal specifications or even hiring my own personal hairdresser to tame the ‘fro every morning before blessing the outdoors with my presence.  Well, what do we need to teach our children about achieving these goals for themselves?  We need to teach them about the struggle to maximize current income flow so that they can celebrate its abundance later.  In other words: delayed gratification through sound investment decisions.  We should let them know that one culprit in the deterioration of our effort to live in abundance can be explained by the amount of interest paid on debt.  On the flip side, they need to know that they can benefit tremendously from the interest income earned on investments they make which will help them to move closer to their goal.


Great!  You’ve taken care of the basics on the investment education side and your child has started to invest.  Now, let’s discuss the taxes.  There are a few things you should know about how this will affect your bottom line or little Jade’s while she is still your dependant.  Once little Jade starts investing, there are some tax rules the IRS wants parents to know about.  These rules will help you, as parents, determine whether Jade’s investment income will be taxed at your rate or at Jade’s rate.        


Investment Income:   Children with investment income may have part or all of this income taxed at their parent’s tax rate rather than the child’s tax rate.  Investment income includes interest, dividends, capital gains and other unearned income.


Age Requirement:   Jade’s tax must be figured using the parent’s rate if Jade has investment income of more than $1,900 and she meets one of three age requirements for 2009:

(i)                  born after January 1, 1992

(ii)                born after January 1, 1991, and before January 2, 1992 and has earned income that does not exceed one-half of their own support for the year

(iii)               born after January 1996, and before January 2, 1991 and a full-time student with earned income that does not exceed one-half of the child’s support for the year.


More information about this rule is available on the IRS website and, specifically, in IRS Publication 929 entitled, “Tax Rules for Children and Dependents”. 


Marsha Henry

Tax Quarry


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