Do parents need to report a child's $4,000 unearned income on their own tax return?

Whether parents must report a child’s $4,000 of unearned income (such as interest, dividends, or capital gains) on their own tax return depends on several factors and the choices made by the parents. The Internal Revenue Code provides two main approaches for handling a child’s unearned income: (1) the child files their own tax return, or (2) the parents elect to include the child’s income on their own return using Form 8814. Below is a detailed analysis of the rules, requirements, and consequences for each approach.

1. General Rule: Child’s Unearned Income Is Not Automatically Reported on Parent’s Return

By default, a child’s unearned income is reported on the child’s own tax return, not the parent’s. However, if the child’s unearned income exceeds a certain threshold, special rules (the “kiddie tax”) apply, and the income may be taxed at the parent’s marginal rate, but still on the child’s return using Form 8615.

For 2025, the unearned income threshold for the kiddie tax is $2,700. If a child’s unearned income exceeds this amount, the excess is taxed at the parent’s rate, but the income is still reported on the child’s return unless the parents make a specific election.

2. Parent’s Election to Report Child’s Unearned Income (Form 8814)

Parents may elect to include a child’s unearned income on their own tax return using Form 8814, but only if all of the following conditions are met:

• The child was under age 19 at the end of the year (or under age 24 if a full-time student).
• The child’s only income is from interest, dividends, and capital gain distributions (including Alaska Permanent Fund dividends).
• The child’s gross income is less than $13,500 for 2025.
• The child is required to file a return unless the parent makes this election.
• The child does not file a joint return.
• No estimated tax payments were made for the child, and no federal income tax was withheld from the child’s income.
• The parent is the one whose return must be used for the kiddie tax calculation (see “Which Parent’s Return to Use”).

If these conditions are met, the parent may choose to report the child’s unearned income on their own return. This is optional, not mandatory.

3. If No Election Is Made: Child Files Their Own Return

If the parent does not make the election, the child must file their own tax return if their unearned income exceeds the standard deduction for dependents (for 2025, generally $1,350 or the child’s earned income plus $350, up to the regular standard deduction for a single filer).

If the child’s unearned income exceeds $2,700, the portion above $2,700 is subject to the kiddie tax and taxed at the parent’s marginal rate, but this is still reported on the child’s return using Form 8615.

4. Tax Consequences of the Parent’s Election

If the parent elects to report the child’s unearned income on their own return:

• The first $1,350 is not taxed.
• The next $1,350 is taxed at 10%.
• Any amount above $2,700 (i.e., $1,300 in this case) is taxed at the parent’s marginal rate.
• The child does not file a separate return.
• The parent’s adjusted gross income increases by the child’s income, which may affect phaseouts and eligibility for certain credits and deductions (e.g., IRA deduction, student loan interest deduction, child tax credit, education credits, earned income credit).
• The parent cannot claim certain deductions the child could have claimed (e.g., additional standard deduction for blindness, penalty on early withdrawal, itemized deductions for the child’s charitable contributions).
• If the child received qualified dividends or capital gain distributions, the parent may pay more tax than if the child filed separately, because the first $2,700 is taxed at 10% rather than the preferential capital gains/dividends rates.

5. Summary Table: Must Parents Report the Child’s $4,000 Unearned Income?

6. Penalties for Noncompliance

If the child is required to file a return and does not, penalties and interest may apply. If the parent makes the election but does not properly report the income, similar penalties may apply.

7. Conclusion

Parents are not required to report a child’s $4,000 unearned income on their own tax return unless they choose to do so by making the election on Form 8814 and all eligibility requirements are met. Otherwise, the child must file their own tax return, and the “kiddie tax” rules will apply to the portion of unearned income above $2,700, which will be taxed at the parent’s rate but reported on the child’s return.

If you are considering which approach is more beneficial, you should compare the total tax liability under both scenarios, as the election can affect the parent’s AGI, phaseouts, and eligibility for credits, and may result in a higher tax rate on certain types of income.

If you need guidance on which parent’s return to use for the election or the kiddie tax calculation, or if the child has other types of income, further details may be needed.