How does the IRS define unearned income for a child's tax filing requirements?
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The IRS defines "unearned income" for a child's tax filing requirements as all income that is not "earned income." According to Treasury Regulations and the Internal Revenue Code, "earned income" is generally income attributable to wages, salaries, or other amounts received as compensation for personal services (as defined in IRC §911(d)(2)). Therefore, unearned income is any income that does not fall into these categories.
1. Types of Unearned Income:
- Interest (such as from savings accounts, bonds, or loans)- Dividends (including ordinary and qualified dividends)- Capital gains (including capital gain distributions from mutual funds)- Rents and royalties- Pension and annuity income- Taxable social security benefits- Trust and estate income (to the extent included in the child’s gross income)- Unemployment compensation- Alimony- Income from property received as a gift (including gifts under the Uniform Gift to Minors Act)- Any other income not received for personal services performed by the child
2. Key Legal Details:
- The IRS includes as unearned income any income that is not earned income, regardless of the source of the assets that produced the income. This means that unearned income includes income from property transferred to the child by parents, grandparents, or any other person, as well as income generated from assets purchased with the child’s own earned income (e.g., interest on a savings account funded by the child’s wages).- Social security and pension benefits paid to the child are considered unearned income to the extent they are includible in the child’s gross income.- For purposes of the "kiddie tax" (the tax on a child’s unearned income over a certain threshold at the parent’s tax rate), unearned income is specifically defined as the portion of the child’s adjusted gross income that is not earned income, reduced by the sum of the standard deduction amount for dependents and the greater of $500 (as adjusted for inflation) or the child’s itemized deductions directly connected with the production of unearned income.
3. Examples:
- If a child receives $3,000 in interest from a bank account and $1,000 from a paper route, the $3,000 is unearned income and the $1,000 is earned income.- If a child receives a gift of stock from a grandparent and earns dividends from that stock, the dividends are unearned income, even though the gift was not from a parent.
4. Summary Table of Unearned Income (not exhaustive):
- Interest
- Dividends
- Capital gains
- Rents
- Royalties
- Trust/estate income
- Social security/pension (if taxable)
- Unemployment compensation- Alimony
- Income from property (including gifts)
In summary, for a child's tax filing requirements, unearned income is broadly defined as all income not received for personal services, and includes investment income, gifts, trust income, and other passive income sources.
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