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Hr block com 2. Hr block com   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Hr block com How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Hr block com Deferral percentage. Hr block com Employee compensation. Hr block com Compensation of self-employed individuals. Hr block com Choice not to treat deferrals as compensation. Hr block com Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Hr block com Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Hr block com S. Hr block com Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Hr block com Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Hr block com A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Hr block com SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Hr block com A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Hr block com Eligible employee. Hr block com   An eligible employee is an individual who meets all the following requirements. Hr block com Has reached age 21. Hr block com Has worked for you in at least 3 of the last 5 years. Hr block com Has received at least $550 in compensation from you in 2013. Hr block com This amount remains the same in 2014. Hr block com    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Hr block com Excludable employees. Hr block com   The following employees can be excluded from coverage under a SEP. Hr block com Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Hr block com Nonresident alien employees who have received no U. Hr block com S. Hr block com source wages, salaries, or other personal services compensation from you. Hr block com For more information about nonresident aliens, see Publication 519, U. Hr block com S. Hr block com Tax Guide for Aliens. Hr block com Setting Up a SEP There are three basic steps in setting up a SEP. Hr block com You must execute a formal written agreement to provide benefits to all eligible employees. Hr block com You must give each eligible employee certain information about the SEP. Hr block com A SEP-IRA must be set up by or for each eligible employee. Hr block com Many financial institutions will help you set up a SEP. Hr block com Formal written agreement. Hr block com   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Hr block com You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Hr block com However, see When not to use Form 5305-SEP, below. Hr block com   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Hr block com Keep the original form. Hr block com Do not file it with the IRS. Hr block com Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Hr block com See the Form 5305-SEP instructions for details. Hr block com If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Hr block com When not to use Form 5305-SEP. Hr block com   You cannot use Form 5305-SEP if any of the following apply. Hr block com You currently maintain any other qualified retirement plan other than another SEP. Hr block com You have any eligible employees for whom IRAs have not been set up. Hr block com You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Hr block com You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Hr block com An affiliated service group described in section 414(m). Hr block com A controlled group of corporations described in section 414(b). Hr block com Trades or businesses under common control described in section 414(c). Hr block com You do not pay the cost of the SEP contributions. Hr block com Information you must give to employees. Hr block com   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Hr block com An IRS model SEP is not considered adopted until you give each employee this information. Hr block com Setting up the employee's SEP-IRA. Hr block com   A SEP-IRA must be set up by or for each eligible employee. Hr block com SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Hr block com You send SEP contributions to the financial institution where the SEP-IRA is maintained. Hr block com Deadline for setting up a SEP. Hr block com   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Hr block com Credit for startup costs. Hr block com   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Hr block com For more information, see Credit for startup costs under Reminders, earlier. Hr block com How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Hr block com If you are self-employed, you can contribute to your own SEP-IRA. Hr block com Contributions must be in the form of money (cash, check, or money order). Hr block com You cannot contribute property. Hr block com However, participants may be able to transfer or roll over certain property from one retirement plan to another. Hr block com See Publication 590 for more information about rollovers. Hr block com You do not have to make contributions every year. Hr block com But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Hr block com When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Hr block com Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Hr block com A SEP-IRA cannot be a Roth IRA. Hr block com Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Hr block com Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Hr block com If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Hr block com Participants age 70½ or over must take required minimum distributions. Hr block com Time limit for making contributions. Hr block com   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Hr block com Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Hr block com Compensation generally does not include your contributions to the SEP. Hr block com The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Hr block com Example. Hr block com Your employee, Mary Plant, earned $21,000 for 2013. Hr block com The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Hr block com Contributions for yourself. Hr block com   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Hr block com However, special rules apply when figuring your maximum deductible contribution. Hr block com See Deduction Limit for Self-Employed Individuals , later. Hr block com Annual compensation limit. Hr block com   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Hr block com However, $51,000 is the maximum contribution for an eligible employee. Hr block com These limits are $260,000 and $52,000, respectively, in 2014. Hr block com Example. Hr block com Your employee, Susan Green, earned $210,000 for 2013. Hr block com Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Hr block com More than one plan. Hr block com   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Hr block com When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Hr block com Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Hr block com Tax treatment of excess contributions. Hr block com   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Hr block com 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Hr block com $51,000. Hr block com Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Hr block com For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Hr block com Reporting on Form W-2. Hr block com   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Hr block com Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Hr block com If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Hr block com Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Hr block com Your contributions (including any excess contributions carryover). Hr block com 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Hr block com In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Hr block com Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Hr block com When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Hr block com The deduction for the deductible part of your self-employment tax. Hr block com The deduction for contributions to your own SEP-IRA. Hr block com The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Hr block com For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Hr block com To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Hr block com Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Hr block com Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Hr block com However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Hr block com If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Hr block com Excise tax. Hr block com   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Hr block com For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Hr block com When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Hr block com If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Hr block com If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Hr block com Example. Hr block com You are a fiscal year taxpayer whose tax year ends June 30. Hr block com You maintain a SEP on a calendar year basis. Hr block com You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Hr block com Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Hr block com For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Hr block com S. Hr block com Return of Partnership Income; and corporations deduct them on Form 1120, U. Hr block com S. Hr block com Corporation Income Tax Return, or Form 1120S, U. Hr block com S. Hr block com Income Tax Return for an S Corporation. Hr block com Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Hr block com (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Hr block com , you receive from the partnership. Hr block com ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Hr block com Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Hr block com (See the Caution, next. Hr block com ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Hr block com This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Hr block com You are not allowed to set up a SARSEP after 1996. Hr block com However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Hr block com If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Hr block com Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Hr block com At least 50% of your employees eligible to participate choose to make elective deferrals. Hr block com You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Hr block com The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Hr block com SARSEP ADP test. Hr block com   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Hr block com A highly compensated employee is defined in chapter 1. Hr block com Deferral percentage. Hr block com   The deferral percentage for an employee for a year is figured as follows. Hr block com   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Hr block com Employee compensation. Hr block com   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Hr block com Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Hr block com See Compensation in chapter 1. Hr block com Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Hr block com Compensation of self-employed individuals. Hr block com   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Hr block com   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Hr block com Choice not to treat deferrals as compensation. Hr block com   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Hr block com Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Hr block com 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Hr block com $17,500. Hr block com The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Hr block com Cash or deferred arrangement (section 401(k) plan). Hr block com Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Hr block com SIMPLE IRA plan. Hr block com In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Hr block com Catch-up contributions. Hr block com   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Hr block com The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Hr block com Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Hr block com However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Hr block com The catch-up contribution limit. Hr block com The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Hr block com   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Hr block com Overall limit on SEP contributions. Hr block com   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Hr block com The same rule applies to contributions you make to your own SEP-IRA. Hr block com See Contribution Limits , earlier. Hr block com Figuring the elective deferral. Hr block com   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Hr block com Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Hr block com However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Hr block com Excess deferrals. Hr block com   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Hr block com For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Hr block com The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Hr block com See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Hr block com Excess SEP contributions. Hr block com   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Hr block com You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Hr block com If you do not notify them within this time period, you must pay a 10% tax on the excess. Hr block com For an explanation of the notification requirements, see Rev. Hr block com Proc. Hr block com 91-44, 1991-2 C. Hr block com B. Hr block com 733. Hr block com If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Hr block com Reporting on Form W-2. Hr block com   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Hr block com You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Hr block com You must also include them in box 12. Hr block com Mark the “Retirement plan” checkbox in box 13. Hr block com For more information, see the Form W-2 instructions. Hr block com Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Hr block com Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Hr block com Distributions are subject to IRA rules. Hr block com Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Hr block com For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Hr block com Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Hr block com Making excess contributions. Hr block com Making early withdrawals. Hr block com Not making required withdrawals. Hr block com For information about these taxes, see chapter 1 in Publication 590. Hr block com Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Hr block com Prohibited transaction. Hr block com   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Hr block com In that case, the SEP-IRA will no longer qualify as an IRA. Hr block com For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Hr block com Effects on employee. Hr block com   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Hr block com The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Hr block com Also, the employee may have to pay the additional tax for making early withdrawals. Hr block com Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Hr block com See Setting Up a SEP , earlier. Hr block com Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Hr block com You must also give them notice of any excess contributions. Hr block com For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Hr block com Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Hr block com For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Hr block com Prev  Up  Next   Home   More Online Publications
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Hr block com 31. Hr block com   Tax on Unearned Income of Certain Children Table of Contents What's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Hr block com Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Hr block com Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Hr block com Figuring the Child's Tax (Form 8615, Part III) What's New Net Investment Income Tax. Hr block com . Hr block com  For tax years beginning after December 31, 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). Hr block com NIIT is a 3. Hr block com 8% tax on the lesser of the net investment income or the excess of the child's modified adjusted gross income (MAGI) over the threshold amount. Hr block com Use Form 8960, Net Investment Income Tax, to figure this tax. Hr block com For more information on NIIT, go to www. Hr block com irs. Hr block com gov and enter “Net Investment Income Tax” in the search box. Hr block com Introduction This chapter discusses the following two rules that may affect the tax on unearned income of certain children. Hr block com If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Hr block com (See Parent's Election To Report Child's Interest and Dividends , later. Hr block com ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Hr block com (See Tax for Certain Children Who Have Unearned Income , later. Hr block com ) For these rules, the term “child” includes a legally adopted child and a stepchild. Hr block com These rules apply whether or not the child is a dependent. Hr block com Useful Items - You may want to see: Publication 929 Tax Rules for Children and Dependents Form (and Instructions) 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Hr block com The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Hr block com Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Hr block com Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Hr block com Parents are married. Hr block com   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Hr block com Parents not living together. Hr block com   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Hr block com If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Hr block com   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2. Hr block com Parents are divorced. Hr block com   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Hr block com Custodial parent remarried. Hr block com   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Hr block com Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Hr block com Do not use the return of the noncustodial parent. Hr block com   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Hr block com If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Hr block com Parents never married. Hr block com   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Hr block com If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Hr block com Widowed parent remarried. Hr block com   If a widow or widower remarries, the new spouse is treated as the child's other parent. Hr block com The rules explained earlier under Custodial parent remarried apply. Hr block com Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Hr block com If you do, your child will not have to file a return. Hr block com You can make this election only if all the following conditions are met. Hr block com Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Hr block com Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Hr block com The child's gross income was less than $10,000. Hr block com The child is required to file a return unless you make this election. Hr block com The child does not file a joint return for the year. Hr block com No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Hr block com No federal income tax was taken out of your child's income under the backup withholding rules. Hr block com You are the parent whose return must be used when applying the special tax rules for children. Hr block com (See Which Parent's Return To Use , earlier. Hr block com ) These conditions are also shown in Figure 31-A. Hr block com Certain January 1 birthdays. Hr block com   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Hr block com You cannot make this election for such a child unless the child was a full-time student. Hr block com   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Hr block com You cannot make this election for such a child. Hr block com Full-time student. Hr block com   A full-time student is a child who during some part of each of any 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time on-farm training course given by a school or a state, county, or local government agency. Hr block com A school includes a technical, trade, or mechanical school. Hr block com It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Hr block com How to make the election. Hr block com   Make the election by attaching Form 8814 to your Form 1040. Hr block com (If you make this election, you cannot file Form 1040A or Form 1040EZ. Hr block com ) Attach a separate Form 8814 for each child for whom you make the election. Hr block com You can make the election for one or more children and not for others. Hr block com Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Hr block com Rate may be higher. Hr block com   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Hr block com This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Hr block com However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Hr block com Deductions you cannot take. Hr block com   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Hr block com The additional standard deduction if the child is blind. Hr block com The deduction for a penalty on an early withdrawal of your child's savings. Hr block com Itemized deductions (such as your child's investment expenses or charitable contributions). Hr block com Reduced deductions or credits. Hr block com   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following. Hr block com Deduction for contributions to a traditional individual retirement arrangement (IRA). Hr block com Deduction for student loan interest. Hr block com Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Hr block com Credit for child and dependent care expenses. Hr block com Child tax credit. Hr block com Education tax credits. Hr block com Earned income credit. Hr block com Penalty for underpayment of estimated tax. Hr block com   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Hr block com If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Hr block com See chapter 4 for more information. Hr block com Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Hr block com Only the amount over $2,000 is added to your income. Hr block com The amount over $2,000 is shown on Form 8814, line 6. Hr block com Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Hr block com Include the amount from Form 8814, line 12, on Form 1040, line 21. Hr block com Enter “Form 8814” on the dotted line next to line 21. Hr block com If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040, line 21. Hr block com Capital gain distributions and qualified dividends. Hr block com   If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Publication 929, Part 2. Hr block com If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Publication 929, Part 2. Hr block com Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Hr block com This tax is added to the tax figured on your income. Hr block com This additional tax is the smaller of: 10% × (your child's gross income − $1,000), or $100. Hr block com Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. Hr block com Check box a on Form 1040, line 44. Hr block com Figure 31-A. Hr block com Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Hr block com Figure 31–A. Hr block com Can You Include Your Child's Income On Your Tax Return? Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Hr block com If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Hr block com Attach the completed form to the child's Form 1040 or Form 1040A. Hr block com When Form 8615 must be filed. Hr block com   Form 8615 must be filed for a child if all of the following statements are true. Hr block com The child's investment income was more than $2,000. Hr block com The child is required to file a return for 2013. Hr block com The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Hr block com At least one of the child's parents was alive at the end of 2013. Hr block com The child does not file a joint return for 2013. Hr block com These conditions are also shown in  Figure 31-B. Hr block com Earned income. Hr block com   Earned income includes salaries, wages, tips, and other payments received for personal services performed. Hr block com It does not include unearned income as defined later in this chapter. Hr block com Support. Hr block com   Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Hr block com To figure your child's support, count support provided by you, your child, and others. Hr block com However, a scholarship received by your child is not considered support if your child is a full-time student. Hr block com See chapter 3 for details about support. Hr block com Certain January 1 birthdays. Hr block com   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Hr block com Figure 31-B. Hr block com Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Hr block com Figure 31-B. Hr block com Do You Have To Use Form 8615 To Figure Your Child's Tax?    IF a child was born on. Hr block com . Hr block com . Hr block com THEN, at the end of 2013, the child is considered to be. Hr block com . Hr block com . Hr block com January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Hr block com The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Hr block com  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Hr block com  ***Do not use Form 8615 for this child. Hr block com Providing Parental Information (Form 8615, lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Hr block com (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Hr block com ) On line C, check the box for the parent's filing status. Hr block com See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615. Hr block com Parent with different tax year. Hr block com   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Hr block com Parent's return information not known timely. Hr block com   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Hr block com   You can use any reasonable estimate. Hr block com This includes using information from last year's return. Hr block com If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Hr block com    When you get the correct information, file an amended return on Form 1040X, Amended U. Hr block com S. Hr block com Individual Income Tax Return. Hr block com   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Hr block com S. Hr block com Individual Income Tax Return. Hr block com Extensions are discussed in chapter 1. Hr block com Step 1. Hr block com Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Hr block com To do that, use Form 8615, Part I. Hr block com Line 1 (unearned income). Hr block com   If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Hr block com Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. Hr block com Form 1040EZ cannot be used if Form 8615 must be filed. Hr block com   If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Hr block com   However, if the child has: excluded any foreign earned income, deducted either a loss from self-employment, or deducted a net operating loss from another year, then use the Alternate Worksheet for Form 8615, Line 1, in Publication 929 to figure the amount to enter on Form 8615, line 1. Hr block com Unearned income defined. Hr block com   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. Hr block com It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, the taxable part of social security and pension payments, and certain distributions from trusts. Hr block com Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Hr block com Nontaxable income. Hr block com   For this purpose, unearned income includes only amounts the child must include in total income. Hr block com Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Hr block com Income from property received as a gift. Hr block com   A child's unearned income includes all income produced by property belonging to the child. Hr block com This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Hr block com   A child's unearned income includes income produced by property given as a gift to the child. Hr block com This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Hr block com Example. Hr block com Amanda Black, age 13, received the following income. Hr block com Dividends — $800 Wages — $2,100 Taxable interest — $1,200 Tax-exempt interest — $100 Net capital gains — $100 The dividends were qualified dividends on stock given to her by her grandparents. Hr block com Amanda's unearned income is $2,100. Hr block com This is the total of the dividends ($800), taxable interest ($1,200), and net capital gains ($100). Hr block com Her wages are earned (not unearned) income because they are received for work actually done. Hr block com Her tax-exempt interest is not included because it is nontaxable. Hr block com Trust income. Hr block com   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Hr block com   However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income. Hr block com Line 2 (deductions). Hr block com   If the child does not itemize deductions on Schedule A (Form 1040), enter $2,000 on line 2. Hr block com   If the child does itemize deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with the production of unearned income entered on line 1, or $2,000. Hr block com Directly connected. Hr block com   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Hr block com These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Hr block com   These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Hr block com Only the amount greater than 2% of the child's adjusted gross income can be deducted. Hr block com See chapter 28 for more information. Hr block com Example 1. Hr block com Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2% limit) that are directly connected with his unearned income. Hr block com His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Hr block com Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly connected itemized deductions of $300. Hr block com Example 2. Hr block com Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Hr block com She has no other income. Hr block com She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her unearned income. Hr block com Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Hr block com The amount on line 2 is $2,050. Hr block com This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Hr block com Line 3. Hr block com   Subtract line 2 from line 1 and enter the result on this line. Hr block com If zero or less, do not complete the rest of the form. Hr block com However, you must still attach Form 8615 to the child's tax return. Hr block com Figure the tax on the child's taxable income in the normal manner. Hr block com Line 4 (child's taxable income). Hr block com   Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27. Hr block com   However, if the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, see the Form 8615 instructions or Pub. Hr block com 929. Hr block com Line 5 (net unearned income). Hr block com   A child's net unearned income cannot be more than his or her taxable income. Hr block com Enter on Form 8615, line 5, the smaller of line 3 or line 4. Hr block com This is the child's net unearned income. Hr block com   If zero or less, do not complete the rest of the form. Hr block com However, you must still attach Form 8615 to the child's tax return. Hr block com Figure the tax on the child's taxable income in the normal manner. Hr block com Step 2. Hr block com Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Hr block com The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Hr block com When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Hr block com For example, do not refigure the medical expense deduction. Hr block com Figure the tentative tax on Form 8615, lines 6 through 13. Hr block com Note. Hr block com If the child or parent has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II. Hr block com Line 6 (parent's taxable income). Hr block com   Enter on line 6 the parent's taxable income from Form 1040, line 43, Form 1040A, line 27, or Form 1040EZ, line 6. Hr block com   If the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) was used to figure the parent's tax, enter the amount from line 3 of that worksheet instead of the parent's taxable income. Hr block com Line 7 (net unearned income of other children). Hr block com   If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Hr block com Do not include the amount from line 5 of the Form 8615 being completed. Hr block com Example. Hr block com Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Hr block com The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon — $800 Jerry — $600 Mike — $1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Hr block com Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Hr block com Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Hr block com Other children's information not available. Hr block com   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Hr block com See Parent's return information not known timely , earlier. Hr block com Line 11 (tentative tax). Hr block com   Subtract line 10 from line 9 and enter the result on this line. Hr block com This is the tentative tax. Hr block com   If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Hr block com Also skip the discussion for lines 12a and 12b that follows. Hr block com Lines 12a and 12b (dividing the tentative tax). Hr block com   If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net unearned income. Hr block com This is done on lines 12a, 12b, and 13. Hr block com Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Hr block com Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. Hr block com Example. Hr block com In the earlier example under Line 7 (net unearned income of other children), Sharon's Form 8615 shows $1,600 on line 7. Hr block com The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). Hr block com The decimal on line 12b is  . Hr block com 333, figured as follows and rounded to three places. Hr block com   $800 = . Hr block com 333     $2,400   Step 3. Hr block com Figuring the Child's Tax (Form 8615, Part III) The final step in figuring a child's tax using Form 8615 is to determine the larger of: The total of: The child's share of the tentative tax based on the parent's tax rate, plus The tax on the child's taxable income in excess of net unearned income, figured at the child's tax rate, or The tax on the child's taxable income, figured at the child's tax rate. Hr block com This is the child's tax. Hr block com It is figured on Form 8615, lines 14 through 18. Hr block com Alternative minimum tax. Hr block com   A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. Hr block com See Alternative Minimum Tax (AMT) in chapter 30. Hr block com    For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. Hr block com For information on special limits that apply to a child who files Form 6251, see Certain Children Under Age 24 in the Instructions for Form 6251. Hr block com Prev  Up  Next   Home   More Online Publications