The kiddie tax rules apply for tax year 2009 if:

• at the end of 2009, the child is either: (a) under age 18, or (b) age 18 (or

  a full-time student age 19-23) and has earned income less than or equal to half

  of the child's support;

• the child has more than $1,900 of investment income for the year;

• either parent was alive on Dec. 31, 2009; or

• the child does not file a joint tax return for tax year 2009.

A child's investment income is defined as follows:

Total Income - Earned Income = Investment Income

For 2009, a child's investment income is first reduced by a $950 standard

deduction. The next $950 is taxed at the child's tax rate and the remainder is

taxed at the parents' tax rate.

The following table summarizes the tax treatment of a dependent child's

income for the year 2009: 

There are two ways that a child can file a tax return in order to

report potentially taxable income:

• Child files a separate tax return. In that case, IRS Form 8615, Tax

for Certain Children who have Investment Income of More Than $1,900,

must be completed and attached to the child's Form 1040. If there is more than

one child in a family subject to the kiddie tax, then the investment income of

all such children is combined with the income of the parents to determine the

tax liability.

If the child cannot sign the tax return, then either parent may sign the

child's name in the appropriate space. The notation "by, (parent's signature),

parent for minor child."

• If certain requirements are met, then parents of a child who is subject to

the kiddie tax may elect to report the child's income on the parents' tax

return. Form 8814, Parents' Election to Report Child's Interest and

Dividends, would have to be completed and included with the parents'

tax return. This option is available only if all of the following conditions are

met: (1) the child's only income is from interest, dividend and /or capital gain

distributions; (2) the child's total income for the year is less than $9,500;

(3) no overpayments are applied to the child's current year return; and (4) no

estimated or withholding tax has been paid in the child's name.

What are the advantages of reporting a child's income on the parent's

tax return?

The advantages include:

1. no need to file a separate tax return for the child;

2. the first $1,900 of the child's investment income is taxed on form 8814 and

   is not included in the parents' taxable income; and

3. in states that base the parents state taxable income on federal taxable

   income, lower state tax liability could occur.

What are the disadvantages of reporting the child's income on the

parents' tax return?

The disadvantages include:

1. higher adjusted gross income (AGI) for the parents, resulting in the

   possible loss of tax credits and deductions. Higher AGI could also result in a

   larger state tax liability for parents who live in states in which the state tax

   liability is based on the federal AGI; and

2. greater tax on the child's income. When using form 8814, the child's first

   $950 of income is taxed at 10 percent. If this income consists of capital gain

   distributions or qualified dividends, the applicable tax rate on a separate

   return for the child may be zero percent. Reporting a child's income on the

   parent's tax return and using Form 8814 to compute the child's tax may result in

   as much as $95 (10% of $9,500) in additional taxes.

Finally, the Small Business and Work Opportunity Act of 2007 made significant

changes to the kiddie tax by expanding the tax to additional individuals when

all of the following conditions apply:

• Children age 18 and younger; children age 23 and younger who are full-time

  students (until this law change, the kiddie tax rules applied only to children

  age 17 and younger);

• The child's earned income does not exceed half of his or her support for the

  tax year. Scholarships are not included when determining whether a child is

  providing at least half of his or her support.

• The child has at least one living parent at the close of the tax year; and

• The child does not file a joint return for the year.

Parents also need to be aware that some children may be subject to the

Alternative Minimum Tax (AMT). The AMT exemption for a child whose investment

income is taxed at the parent's tax rate is $6,700 for 2009. IRS Form 6251 (used

to compute the AMT) should be prepared in the event a child's investment is