Most parents decide to report the investment income of their child who is under the age of 14 on their tax return (use form 8814 and attach it to your tax return). What they fail to realize is that the income might raise their adjusted gross income and could reduce the deductions and credits that they would normally receive.
The first $700 dollars of a child's income is tax-free. Therefore, parents can claim that first $700 as dollar for dollar credit. The next $700 is taxed at 15%. However, if the amount for a child's investment interest exceeds $1400 and the parent happens to be in a higher tax bracket, the amount that exceeds $1400 is taxed at the parent's tax rate. As the income rises, the benefits of the deductions and credits that you would normally claim shrink.
If your child has a very high investment income, it's usually a wise choice to file a separate return. It will save you money in the long term. In addition, you will not be able to claim the following deductions if you choose to file a child's tax return in combination with yours:
