Publication 929 - Tax Rules For Children And Dependents

1. For 2006, the employee had a right to a

Capital gain distribution

Parents not living together.

If the child’s

refund of all federal income tax withheld

parents are married to each other but not living

Dependent

because he or she had no tax liability.

together, and the parent with whom the child

Earned income

lives (the custodial parent) is considered unmar-

2. For 2007, the employee expects a refund

Gross income

ried, use the return of the custodial parent. If the

of all federal income tax withheld because

Investment income

custodial parent is not considered unmarried,

he or she expects to have no tax liability.

Itemized deductions

use the return of the parent with the greater

Net capital gain

taxable income.

Dependents. An employee who is a depen-

Net investment income

For an explanation of when a married person

dent ordinarily cannot claim exemption from

Qualified dividends

living apart from his or her spouse is considered

withholding if both of the following are true.

Standard deduction

•

unmarried, see Head of Household in Publica-

The employee’s total income will be more

Tax year

tion 501.

than the minimum standard deduction

Taxable income

amount. This amount was $850 for 2006,

Parents are divorced. If the child’s parents

Unearned income

but may be higher for 2007. Check the

are divorced or legally separated, and the parent

instructions for the 2007 Form W-4 for the

Unrecaptured section 1250 gain

who had custody of the child for the greater part

correct amount.

28% rate gain

•

of the year (the custodial parent) has not remar-

The employee’s unearned income will be

ried, use the return of the custodial parent.

more than $300.

The two rules that follow may affect the tax on

Custodial parent remarried. If the custo-

certain investment income of a child under age

Exceptions. An employee who is age 65 or

dial parent has remarried, the stepparent (rather

18.

older or blind, or who will claim adjustments to

than the noncustodial parent) is treated as the

income, itemized deductions, or tax credits on

1. If the child’s interest and dividend income

child’s other parent. Therefore, if the custodial

his or her 2007 tax return, may be able to claim

(including capital gain distributions) total

parent and the stepparent file a joint return, use

exemption from withholding even if the em-

less than $8,500, the child’s parent may be

that joint return. Do not use the return of the

ployee is a dependent. For more information,

able to choose to include that income on

noncustodial parent.

see the discussions under Exemption From

the parent’s return rather than file a return

If the custodial parent and the stepparent are

Withholding in chapter 1 of Publication 505, Tax

for the child. (See Parent’s Election To Re-

married, but file separate returns, use the return

Withholding and Estimated Tax.

port Child’s Interest and Dividends, later.)

of the one with the greater taxable income. If the

2. If the child’s interest, dividends, and other

custodial parent and the stepparent are married

Example. Guy is 17 and a student. During

investment income total more than $1,700,

but not living together, the earlier discussion

the summer he works part time at a grocery

part of that income may be taxed at the

under Parents not living together applies.

store. He expects to earn about $1,000 this year.

parent’s tax rate instead of the child’s tax

He also worked at the store last summer and

rate. (See Tax for Children Under Age 18

Parents never married. If a child’s parents

received a refund of all his withheld income tax

Who Have Investment Income of More

did not marry each other, but lived together all

because he did not have a tax liability. The only

Than $1,700, later.)

year, use the return of the parent with the

other income he expects during the year is $375

greater taxable income. If the parents did not live

For these rules, the term “child” includes a

interest on a savings account. He expects that

together all year, the rules explained earlier

legally adopted child and a stepchild. These

his parents will be able to claim him as a depen-

under Parents are divorced apply.

rules apply whether or not the child is a depen-

dent on their tax return. He is not blind and will

dent.

not claim adjustments to income, itemized de-

Widowed parent remarried. If a widow or

These rules do not apply if:

ductions, or tax credits on his return.

•

widower remarries, the new spouse is treated as

Guy cannot claim exemption from withhold-

The child is not required to file a tax return

the child’s other parent. The rules explained

ing when he fills out Form W-4 because his

(see Filing Requirements in Part 1),

earlier under Custodial parent remarried apply.

•

parents will be able to claim him as a dependent,

Neither of the child’s parents were living at

his total income will be more than $850, the

the end of the tax year, or

•

minimum standard deduction amount, and his

The child files a joint return for the year.

unearned income will be more than $300.

Parent’s Election

Claiming exemption from withholding. To

Which Parent’s

To Report Child’s

claim exemption from withholding, an employee

Return To Use

must enter “Exempt” in the space provided on

Interest and Dividends

Form W-4, line 7. The employee must complete

If a child’s parents are married to each other and

the rest of the form, as explained in the form

file a joint return, use the joint return to figure the

instructions, and give it to his or her employer.

You may be able to elect to include your child’s

tax on the investment income of a child under

interest and dividend income (including capital

18. The tax rate and other return information

Renewing an exemption from withholding.

gain distributions) on your tax return. If you do,

from that return are used to figure the child’s tax

An exemption from withholding is good for only

your child will not have to file a return.

as explained later under Tax for Children Under

one year. An employee must file a new Form

You can make this election for 2006 only if

Age 18 Who Have Investment Income of More

W-4 by February 15 each year to continue the

all the following conditions are met.

Than $1,700.

exemption.

•

Your child was under age 18 at the end of

2006. (A child born on January 1, 1989, is

Parents Who Do Not File a Joint

considered to be age 18 at the end of

Return

Part 2. Tax on

2006; you cannot make the election for

this child.)

•

Investment Income

For parents who do not file a joint return, the

Your child had income only from interest

following discussions explain which parent’s tax

and dividends (including capital gain distri-

of Child Under 18

return must be used to figure the tax.

butions and Alaska Permanent Fund divi-

Only the parent whose tax return is used can

dends).

make the election described under Parent’s

•

Terms you may need to know

The dividend and interest income was less

Election To Report Child’s Interest and Divi-

(see Glossary):

than $8,500.

dends.

•

Your child is required to file a return for

Adjusted gross income

2006 unless you make this election.

Parents are married. If the child’s parents file

•

Adjustments to income

separate returns, use the return of the parent

The child does not file a joint return for

Alternative minimum tax

with the greater taxable income.

2006.

Page 6

Publication 929 (2006)

Publication 929 - Tax Rules For Children And Dependents - 2006 Page 6

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