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Tax Law Changes Related to Midwestern Disaster Areas

FS-2008-27, December 2008

WASHINGTON — The Heartland Disaster Tax Relief Act of 2008 provides certain tax breaks to help victims of the severe storms, flooding and tornadoes that occurred in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Missouri, Minnesota, Nebraska and Wisconsin that the federal government declared a disaster during the period beginning May 20, 2008, and ending July 31, 2008.

The recently enacted legislation alters the tax code to help individuals who suffered losses as a result of the Midwestern Disasters and to make it easier for individuals and businesses to engage in charity to benefit those affected by the severe storms, flooding and tornadoes.

The counties in these states that encompass the “Midwestern Disaster Areas” are identified in Tables 1 and 2 at the end of this fact sheet. Taxpayers located in the counties listed in Table 1 are eligible for all portions of the relief made available to the Midwestern Disaster Areas by the recently enacted legislation. Those taxpayers located in the counties listed in Table 2 are eligible only for certain special tax provisions. For a more complete listing of the tax relief provisions that the Heartland Disaster Tax Relief Act of 2008 provides to taxpayers located in the counties listed in Tables 1 and 2, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.

Individuals Affected by the Midwestern Disasters

In general, for individuals affected by the Midwestern Disasters, the Heartland Disaster Tax Relief Act of 2008 provides tax-favored early distributions and loans from retirement accounts, eliminates the limitations on claiming losses and permits certain earned income tax credit (EITC) and refundable child tax credit recipients to choose either tax year 2008 or 2007 to determine their earned income and use the more beneficial result.

The recently enacted legislation also allows affected individuals to exclude from income certain cancellations of debt and extends, from two years to five years, the replacement period for converted properties. Portions of the Heartland Disaster Tax Relief Act of 2008 are highlighted below.

Removal of Loss Limitations: For taxpayers who suffered casualty or theft losses to property owned for personal use that are attributable to the Midwestern Disasters, recently enacted legislation removes certain loss limitations. Ordinarily, to figure a deduction for a casualty or theft loss of personal-use property from a particular disaster, taxpayers who itemize must reduce the loss by $100 and also reduce their total casualty and theft losses by 10 percent of their adjusted gross income. Only the excess over these $100 and 10 percent limits is deductible for those taxpayers who itemize their deductions. The recently enacted legislation, however, removes these limits for the Midwestern Disasters on losses of personal-use property, so that the entire amount of unreimbursed losses is deductible if a taxpayer itemizes.

To qualify, a loss must arise in a Midwestern Disaster Area and be attributable to the severe storms, flooding or tornadoes for which the Disaster Declarations identified in Tables 1 and 2 were issued. Note: The new increased standard deduction for net disaster losses does not apply to losses in Midwestern disaster areas.

Cancellation of Debt: Individuals whose main home was located in a Midwestern Disaster Area on the date that a disaster was declared for the county in which they live, will not include in income any non-business debt, such as a mortgage, that is canceled on or after the applicable disaster date and before Jan. 1, 2010, provided that the debt is not secured by property located outside the Midwestern Disaster Areas. If the individual’s main home was located in a Midwestern Disaster Area as shown in Table 2, the individual must also have had an economic loss because of the severe storms, floods or tornadoes. Examples of economic losses include, but are not limited to:

  • Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind or other cause;
  • Loss related to displacement from one’s home; or
  • Loss of livelihood due to temporary or permanent layoffs.

Usually, the cancellation of debt is treated as income by the person for whom the debt is forgiven.

Earned Income Tax Credit and Refundable Child Tax Credit: The recently enacted legislation allows eligible individuals to choose to calculate their earned income tax credit (EITC) or refundable child tax credit using their prior year’s earned income. An eligible individual is one whose earned income in 2008 is less than their earned income in 2007 and their main home on the applicable disaster date was in a Midwestern Disaster Area as shown in Table 1 or their main home on the applicable disaster date was in a Midwestern Disaster Area as shown in Table 2 and they were displaced from that home because of the severe storms, tornadoes or flooding. Taxpayers eligible to make the choice should figure their EITC and refundable child tax credit using their earned income for each year before making the choice to see which gives them the higher credits.

Education Credits: The recently enacted legislation provides educational assistance to students enrolled and paying tuition at eligible educational institutions located in Midwestern Disaster Areas counties identified in Table 1 for any tax year beginning in 2008 or 2009. Basically, the new legislation expands the Hope and Lifetime Learning educational credits in the following way:

  • The Hope Credit is expanded to 100 percent of the first $2,400 in eligible expenses plus 50 percent of the next $2,400 – doubling the maximum Hope Credit from $1,800 to $3,600 for each eligible student.
  • The Lifetime Learning Credit is expanded from 20 percent to 40 percent of the first $10,000 in eligible expenses.

Exemption for Taxpayers Housing Individuals Displaced by the Disasters: Taxpayers who provided housing in their main homes to individuals displaced by the severe storms, tornadoes or flooding that occurred in the Midwestern Disaster Areas may be able to claim an additional exemption amount of $500 for each such displaced individual. The additional exemption amount is allowable once per taxpayer for a specific Midwestern Disaster displaced individual in 2008 or 2009, but not in both years. The maximum additional exemption amount that can be claimed for all displaced individuals is $2,000, or $1,000 if married filing separately. Any exemption amount claimed in 2008 will reduce the $2,000 maximum for 2009.

To qualify as a displaced individual, the individual must have had his or her main home in a Midwestern Disaster Area on the applicable disaster date, and he or she must have been displaced from that home. If the displaced individual’s main home was located in a Midwestern Disaster Area as shown in Table 2, that home must have been damaged by the severe storms, tornadoes or flooding or the individual must have been evacuated from the home because of the severe storms, tornadoes or flooding. In addition, the displaced individual must have been provided housing in the taxpayer’s main home for a period of at least 60 consecutive days ending in the tax year in which the exemption is claimed. The displaced individual cannot be the taxpayer’s spouse or dependent. 

This benefit applies to the counties listed in Tables 1 and 2. More detailed information on claiming the additional exemption can be found in Publication 4492-B.

Recapture of Federal Mortgage Subsidy: Generally, taxpayers who financed their homes under a federally-subsidized program may have to repay all or part of the benefit they received from that program when they sell or otherwise dispose of their home. This repayment is known, technically, as recapture.  Taxpayers do not, however, have to recapture any benefit if their mortgage loan was a qualified home improvement loan of not more than $15,000. The recently enacted legislation provides for this amount to be increased to $150,000, if the loan was provided prior to 2011 and was used to alter, repair, or improve an existing owner-occupied residence in a Midwestern Disaster Area as shown in Table 1. 

Retirement Funds

To help victims of the severe storms, flooding and tornadoes in the Midwestern Disaster Areas, the recently enacted legislation provides certain tax-favored treatment for early distributions, plan loans and re-contributions. These benefits apply to the counties listed in Tables 1 and 2.

Qualified Disaster Recovery Assistance Distributions: A qualified disaster recovery distribution is any distribution from an eligible retirement plan that meets the following requirements:  (1) the distribution was made on or after an applicable disaster date listed in Tables 1 or 2 and before Jan. 1, 2010; (2) the distribution was made to a taxpayer whose main home was located in a Midwestern Disaster Area on the applicable disaster date; and (3) the taxpayer sustained an economic loss because of the severe storms, tornadoes or flooding that affected the Midwestern Disaster Areas. If these requirements are met, the taxpayer can generally designate any distribution from an eligible retirement plan as a qualified disaster recovery assistance distribution, regardless of whether the distribution was made on account of the severe storms, tornadoes or flooding.  The total amount of tax-favored distributions an individual can receive from all plans, annuities or IRAs is $100,000.

Taxation of Qualified Disaster Recovery Assistance Distributions: Qualified disaster recovery assistance distributions are included in income in equal amounts over three years. The taxpayer can, however, elect to include the entire distribution income in the year it was received. An eligible individual who receives qualified disaster recovery assistance distributions does not have to pay the 10% additional tax on early distributions (or the additional 25% tax for certain distributions from SIMPLE IRAs). Under the new law, qualified disaster recovery assistance distributions are not subject to the mandatory 20% withholding. Any distributions received in excess of the $100,000 qualified disaster recovery assistance distribution limit may be subject to the additional tax on early distributions. 

Repayment of Qualified Disaster Recovery Assistance Distributions: Taxpayers may choose to repay any portion of a qualified disaster recovery distribution that is eligible for tax-free rollover treatment into an eligible retirement plan within three years from the date of the distribution. The distribution will be treated as though it were paid in a direct rollover (note that for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a qualified rollover). To report a re-contribution, the eligible individual must also file a Form 8930, Qualified Disaster Recovery Assistance Retirement Plan Distributions and Repayments. Refer to Publication 4492-B for additional information on repaying qualified disaster recovery assistance distributions and for a list of the qualified disaster recovery assistance distributions that cannot be repaid.

Repayment of Qualified Distributions for the Purchase or Construction of a Main Home: An individual who received a qualified distribution to purchase or construct a main home in a Midwestern disaster area can repay part or all of that distribution to an eligible retirement plan on or after the applicable disaster date, but no later than March 3, 2009. To be a qualified distribution, the distribution must meet all of the following requirements:  (1) the distribution is a hardship distribution from a 401(k) plan or a tax-sheltered annuity contract, or a qualified first-time homebuyer distribution from an IRA; (2) the distribution was received within six months prior to the day after the applicable disaster date; and (3) the distribution was used to purchase or construct a main home in a Midwestern Disaster Area that was not purchased or constructed because of the severe storms, tornadoes or flooding. 
Amounts that are repaid before March 4, 2009, are treated as a qualified rollover and are not included in income (note that for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a qualified rollover). If the qualified distribution is not repaid by March 4, 2009, the distribution may be taxable for 2007 or 2008, as well as subject to the additional 10% tax on early distributions (or the additional 25% tax for certain SIMPLE IRAs). Any repayments must be reported on Form 8930, Qualified Disaster Recovery Assistance Retirement Plan Distributions and Repayments.  

Retirement Plan Loans: Under the new law, the allowable retirement plan loan amount for eligible individuals is increased from $50,000 to $100,000. To figure the dollar limit, an eligible individual would start with (a) $100,000 and subtract the highest outstanding balance of loans from these plans during the prior year and compare that figure to (b) the eligible individual’s vested benefit under the plan. Whichever figure is less is the limit that the eligible individual can borrow from the employer’s plans without a tax consequence.

For an eligible individual, payments on retirement plan loans outstanding on or after the applicable disaster date may be suspended for one year by the plan administrator. To qualify for suspension, the due date for any loan payment must occur during the period beginning on the applicable disaster date and ending on Dec. 31, 2009. 

Charity Encouraged by New Law

To encourage charity, the recently enacted legislation suspends the limits on certain charitable contributions, creates an exemption for those housing Midwestern Disaster displaced individuals, increases the standard mileage rate for charitable use of vehicles and excludes from gross income mileage reimbursements to charitable volunteers.

Suspension of Charitable Limits for Certain Charitable Contributions: In the case of an individual, the recently enacted legislation allows a deduction for qualified contributions up to the amount by which the taxpayer’s contribution base – adjusted gross income – exceeds the deduction for other charitable contributions. Contributions in excess of this amount are generally carried over to succeeding taxable years. The recently enacted legislation allows corporations to elect to deduct qualified cash contributions without regard to the 10% of taxable income limit.

Qualified contributions are defined as cash contributions to a charitable organization described in section 170(b)(1)(A) (other than a supporting organization described in section 509(a)(3)), for relief efforts in one or more Midwestern Disaster Areas made after May 1, 2008, and before Jan. 1, 2009. Contributions of non-cash property, such as securities, are not qualified contributions.

The charitable contribution deduction up to the amount of qualified contributions (as defined above) paid during the year is not treated as an itemized deduction for purposes of the overall limitation on itemized deductions. This benefit applies only to the counties listed in Table 1.

Increase in the Standard Mileage Rate for Charitable Use of Vehicles: The recently enacted legislation provides special standard mileage rates for taxpayers who used their vehicles to provide charitable services related solely to the severe storms, tornadoes and flooding that occurred in the Midwestern Disaster Areas during the period May 2, 2008, through Dec. 31, 2008.  The special rate is 36 cents per mile for the period May 2, 2008, through June 30, 2008. For the period July 1, 2008, through Dec. 31, 2008, the special rate is 41 cents per mile.

Taxpayers may also exclude from income any amounts received as mileage reimbursement for the use of a private passenger automobile for the benefit of a qualified charitable organization in responding to the severe storms, tornadoes and flooding that occurred in the Midwestern Disaster Areas during the period May 2, 2008, through Dec. 31, 2008. Taxpayers cannot claim a deduction or credit for any amounts excluded and must keep records of miles driven, time, place (or use) and purpose of the mileage. The amount that can be excluded from income cannot exceed 50.5 cents per mile for the period May 2, 2008, through June 30, 2008; and 58.5 cents per mile for the period July 1, 2008, through Dec. 31, 2008. This benefit applies only to the counties listed in Table 1.

Table 1
Taxpayers located in these counties are eligible for all portions of relief identified in this document.

Applicable Disaster Date*

State 

Affected Counties - Midwestern Disaster Areas 

 5/2/2008  Arkansas Arkansas, Benton, Cleburne, Conway, Crittenden, Grant, Lonoke, Mississippi, Phillips, Pulaski, Saline and Van Buren.
 6/1/2008  Illinois Adams, Calhoun, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson, Jasper, Jersey, Lake, Lawrence, Mercer, Rock Island, Whiteside, and Winnebago.
 6/6/2008  Indiana Adams, Bartholomew, Brown, Clay, Daviess, Dearborn, Decatur, Gibson, Grant, Greene, Hamilton, Hancock, Hendricks, Henry, Huntington, Jackson, Jefferson, Jennings, Johnson, Knox, Lawrence, Madison, Marion, Monroe, Morgan, Owen, Parke, Pike, Posey, Putnam, Randolph, Ripley, Rush, Shelby, Sullivan, Tippecanoe, Vermillion, Vigo, Washington and Wayne.
 5/25/2008  Iowa Adair, Adams, Allamakee, Appanoose, Audubon, Benton, Black Hawk, Boone, Bremer, Buchanan, Butler, Cass, Cedar, Cerro Gordo, Chickasaw, Clarke, Clayton, Clinton, Crawford, Dallas, Davis, Decatur, Delaware, Des Moines, Dubuque, Fayette, Floyd, Franklin, Fremont, Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison, Henry, Howard, Humboldt, Iowa, Jackson, Jasper, Johnson, Jones, Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska, Marion, Marshall, Mills, Mitchell, Monona, Monroe, Montgomery, Muscatine, Page, Polk, Pottawattamie, Poweshiek, Ringgold, Scott, Story, Tama, Union, Van Buren, Wapello, Warren, Washington, Webster, Winnebago, Winneshiek, Worth and Wright.
 5/10/2008  Missouri Barry, Jasper and Newton.
 6/1/2008  Missouri Adair, Andrew, Callaway, Cass, Chariton, Clark, Gentry, Greene, Harrison, Holt, Johnson, Lewis, Lincoln, Linn, Livingston, Macon, Marion, Monroe, Nodaway, Pike, Putnam, Ralls, St. Charles, Stone, Taney, Vernon and Webster.
 5/22/2008  Nebraska Buffalo, Butler, Colfax, Custer, Dawson, Douglas, Gage, Hamilton, Holt, Jefferson, Kearney, Lancaster, Platte, Richardson, Sarpy and Saunders.
 6/5/2008  Wisconsin Adams, Calumet, Crawford, Columbia, Dane, Dodge, Fond du Lac, Grant, Green, Green Lake, Iowa, Jefferson, Juneau, Kenosha, La Crosse, Manitowoc, Marquette, Milwaukee, Monroe, Ozaukee, Racine, Richland, Rock, Sauk, Sheboygan, Vernon, Walworth, Washington, Waukesha and Winnebago.

 

Table 2
Taxpayers located in the counties listed below are eligible for all of the special tax provisions identified in this fact sheet except the education credits, charitable giving incentives (suspension of charitable limits and increase in standard mileage rates) and the recapture of federal mortgage subsidy.**

Applicable Disaster Date*

State

Affected Counties - Midwestern Disaster Areas

 6/1/2008  Illinois Greene, Madison, Monroe, Pike, Randolph, St. Clair and Scott.
 6/6/2008  Indiana Benton, Boone, Fountain, Franklin, Jay, Montgomery, Ohio, Switzerland, Union and Wabash.
 5/25/2008  Iowa Carroll, Cherokee, Lyon, Palo Alto, Pocahontas, Taylor and Wayne.
 5/22/2008  Kansas Barber, Barton, Bourbon, Brown, Butler, Chautauqua, Cherokee, Clark, Clay, Comanche, Cowley, Crawford, Decatur, Dickinson, Edwards, Elk, Ellis, Ellsworth, Franklin, Gove, Graham, Harper, Haskell, Hodgeman, Jackson, Jewell, Kingman, Kiowa, Lane, Linn, Logan, Mitchell, Montgomery, Ness, Norton, Osborne, Pawnee, Phillips, Pratt, Reno, Republic, Riley, Rooks, Rush, Saline, Seward, Sheridan, Smith, Stafford, Sumner, Thomas, Trego, Wallace and Wilson.
 6/6/2008  Michigan Allegan, Barry, Eaton, Ingham, Lake, Manistee, Mason, Missaukee, Osceola, Ottawa, Saginaw and Wexford.
 6/7/2008  Minnesota Cook, Fillmore, Freeborn, Houston, Mower and Nobles.
 6/1/2008  Missouri Atchison, Audrain, Bates, Buchanan, Cape Girardeau, Carroll, Christian, Daviess, Grundy, Howard, Jefferson, Knox, Mercer, Miller, Mississippi, Morgan, New Madrid, Pemiscot, Perry, Pettis, Platte, Polk, Randolph, Ray, Saline, Schuyler, Scotland, Scott, Shelby, St. Genevieve, St. Louis, Sullivan, the Independent City of St. Louis and Worth.
 4/23/2008  Nebraska Gage, Johnson, Morrill, Nemaha and Pawnee.
 5/22/2008  Nebraska Adams, Blaine, Boone, Boyd, Brown, Burt, Cass, Chase, Cherry, Cuming, Dundy, Fillmore, Frontier, Furnas, Garfield, Gosper, Greeley, Hall, Hayes, Howard, Johnson, Keya Paha, Lincoln, Logan, Loup, Merrick, McPherson, Morrill, Nance, Nemaha, Otoe, Phelps, Polk, Red Willow, Rock, Saline, Seward, Sherman, Stanton, Thayer, Thomas, Thurston, Valley, Webster, Wheeler and York.
 6/27/2008  Nebraska Dodge, Douglas, Sarpy and Saunders.
 6/5/2008  Wisconsin Lafayette.


* In some cases the date will be later due to the continuation of the severe storms, tornadoes or flooding that began on the above date. The Federal Emergency Management Agency has more details.

** See Pub. 4492-B for a more complete listing of the tax provisions that are available to taxpayers located in the affected counties in the Midwestern Disaster Areas listed in Tables 1 and 2.

Page Last Reviewed or Updated: 18-Aug-2012

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Software for 1040nr 31. Software for 1040nr   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. Software for 1040nr Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Software for 1040nr Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Software for 1040nr Figuring the Child's Tax (Form 8615, Part III) What's New Net Investment Income Tax. Software for 1040nr . Software for 1040nr  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). Software for 1040nr NIIT is a 3. 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Software for 1040nr You cannot make this election for such a child. Software for 1040nr Full-time student. Software for 1040nr   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. Software for 1040nr A school includes a technical, trade, or mechanical school. Software for 1040nr It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Software for 1040nr How to make the election. Software for 1040nr   Make the election by attaching Form 8814 to your Form 1040. Software for 1040nr (If you make this election, you cannot file Form 1040A or Form 1040EZ. Software for 1040nr ) Attach a separate Form 8814 for each child for whom you make the election. Software for 1040nr You can make the election for one or more children and not for others. Software for 1040nr Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Software for 1040nr Rate may be higher. Software for 1040nr   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. Software for 1040nr This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Software for 1040nr 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. Software for 1040nr Deductions you cannot take. Software for 1040nr   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. Software for 1040nr The additional standard deduction if the child is blind. Software for 1040nr The deduction for a penalty on an early withdrawal of your child's savings. Software for 1040nr Itemized deductions (such as your child's investment expenses or charitable contributions). Software for 1040nr Reduced deductions or credits. Software for 1040nr   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following. Software for 1040nr Deduction for contributions to a traditional individual retirement arrangement (IRA). Software for 1040nr Deduction for student loan interest. Software for 1040nr Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Software for 1040nr Credit for child and dependent care expenses. Software for 1040nr Child tax credit. Software for 1040nr Education tax credits. Software for 1040nr Earned income credit. Software for 1040nr Penalty for underpayment of estimated tax. Software for 1040nr   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. Software for 1040nr 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. Software for 1040nr See chapter 4 for more information. Software for 1040nr Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Software for 1040nr Only the amount over $2,000 is added to your income. Software for 1040nr The amount over $2,000 is shown on Form 8814, line 6. Software for 1040nr Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Software for 1040nr Include the amount from Form 8814, line 12, on Form 1040, line 21. Software for 1040nr Enter “Form 8814” on the dotted line next to line 21. Software for 1040nr 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. Software for 1040nr Capital gain distributions and qualified dividends. Software for 1040nr   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. Software for 1040nr If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Publication 929, Part 2. Software for 1040nr 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. Software for 1040nr This tax is added to the tax figured on your income. Software for 1040nr This additional tax is the smaller of: 10% × (your child's gross income − $1,000), or $100. Software for 1040nr Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. Software for 1040nr Check box a on Form 1040, line 44. Software for 1040nr Figure 31-A. Software for 1040nr Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Software for 1040nr Figure 31–A. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr Attach the completed form to the child's Form 1040 or Form 1040A. Software for 1040nr When Form 8615 must be filed. Software for 1040nr   Form 8615 must be filed for a child if all of the following statements are true. Software for 1040nr The child's investment income was more than $2,000. Software for 1040nr The child is required to file a return for 2013. Software for 1040nr 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. Software for 1040nr At least one of the child's parents was alive at the end of 2013. Software for 1040nr The child does not file a joint return for 2013. Software for 1040nr These conditions are also shown in  Figure 31-B. Software for 1040nr Earned income. Software for 1040nr   Earned income includes salaries, wages, tips, and other payments received for personal services performed. Software for 1040nr It does not include unearned income as defined later in this chapter. Software for 1040nr Support. Software for 1040nr   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. Software for 1040nr To figure your child's support, count support provided by you, your child, and others. Software for 1040nr However, a scholarship received by your child is not considered support if your child is a full-time student. Software for 1040nr See chapter 3 for details about support. Software for 1040nr Certain January 1 birthdays. Software for 1040nr   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Software for 1040nr Figure 31-B. Software for 1040nr Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Software for 1040nr Figure 31-B. Software for 1040nr Do You Have To Use Form 8615 To Figure Your Child's Tax?    IF a child was born on. Software for 1040nr . Software for 1040nr . Software for 1040nr THEN, at the end of 2013, the child is considered to be. Software for 1040nr . Software for 1040nr . Software for 1040nr January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Software for 1040nr The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Software for 1040nr  **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. Software for 1040nr  ***Do not use Form 8615 for this child. Software for 1040nr Providing Parental Information (Form 8615, lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Software for 1040nr (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Software for 1040nr ) On line C, check the box for the parent's filing status. Software for 1040nr 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. Software for 1040nr Parent with different tax year. Software for 1040nr   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. Software for 1040nr Parent's return information not known timely. Software for 1040nr   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. Software for 1040nr   You can use any reasonable estimate. Software for 1040nr This includes using information from last year's return. Software for 1040nr If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Software for 1040nr    When you get the correct information, file an amended return on Form 1040X, Amended U. Software for 1040nr S. Software for 1040nr Individual Income Tax Return. Software for 1040nr   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. Software for 1040nr S. Software for 1040nr Individual Income Tax Return. Software for 1040nr Extensions are discussed in chapter 1. Software for 1040nr Step 1. Software for 1040nr 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. Software for 1040nr To do that, use Form 8615, Part I. Software for 1040nr Line 1 (unearned income). Software for 1040nr   If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Software for 1040nr Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. Software for 1040nr Form 1040EZ cannot be used if Form 8615 must be filed. Software for 1040nr   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. Software for 1040nr   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. Software for 1040nr Unearned income defined. Software for 1040nr   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. Software for 1040nr 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. Software for 1040nr 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). Software for 1040nr Nontaxable income. Software for 1040nr   For this purpose, unearned income includes only amounts the child must include in total income. Software for 1040nr Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Software for 1040nr Income from property received as a gift. Software for 1040nr   A child's unearned income includes all income produced by property belonging to the child. Software for 1040nr 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. Software for 1040nr   A child's unearned income includes income produced by property given as a gift to the child. Software for 1040nr This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Software for 1040nr Example. Software for 1040nr Amanda Black, age 13, received the following income. Software for 1040nr 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. Software for 1040nr Amanda's unearned income is $2,100. Software for 1040nr This is the total of the dividends ($800), taxable interest ($1,200), and net capital gains ($100). Software for 1040nr Her wages are earned (not unearned) income because they are received for work actually done. Software for 1040nr Her tax-exempt interest is not included because it is nontaxable. Software for 1040nr Trust income. Software for 1040nr   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. Software for 1040nr   However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income. Software for 1040nr Line 2 (deductions). Software for 1040nr   If the child does not itemize deductions on Schedule A (Form 1040), enter $2,000 on line 2. Software for 1040nr   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. Software for 1040nr Directly connected. Software for 1040nr   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. Software for 1040nr These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Software for 1040nr   These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Software for 1040nr Only the amount greater than 2% of the child's adjusted gross income can be deducted. Software for 1040nr See chapter 28 for more information. Software for 1040nr Example 1. Software for 1040nr 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. Software for 1040nr His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Software for 1040nr 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. Software for 1040nr Example 2. Software for 1040nr Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Software for 1040nr She has no other income. Software for 1040nr She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her unearned income. Software for 1040nr Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Software for 1040nr The amount on line 2 is $2,050. Software for 1040nr This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Software for 1040nr Line 3. Software for 1040nr   Subtract line 2 from line 1 and enter the result on this line. Software for 1040nr If zero or less, do not complete the rest of the form. Software for 1040nr However, you must still attach Form 8615 to the child's tax return. Software for 1040nr Figure the tax on the child's taxable income in the normal manner. Software for 1040nr Line 4 (child's taxable income). Software for 1040nr   Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27. Software for 1040nr   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. Software for 1040nr 929. Software for 1040nr Line 5 (net unearned income). Software for 1040nr   A child's net unearned income cannot be more than his or her taxable income. Software for 1040nr Enter on Form 8615, line 5, the smaller of line 3 or line 4. Software for 1040nr This is the child's net unearned income. Software for 1040nr   If zero or less, do not complete the rest of the form. Software for 1040nr However, you must still attach Form 8615 to the child's tax return. Software for 1040nr Figure the tax on the child's taxable income in the normal manner. Software for 1040nr Step 2. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr For example, do not refigure the medical expense deduction. Software for 1040nr Figure the tentative tax on Form 8615, lines 6 through 13. Software for 1040nr Note. Software for 1040nr If the child or parent has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II. Software for 1040nr Line 6 (parent's taxable income). Software for 1040nr   Enter on line 6 the parent's taxable income from Form 1040, line 43, Form 1040A, line 27, or Form 1040EZ, line 6. Software for 1040nr   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. Software for 1040nr Line 7 (net unearned income of other children). Software for 1040nr   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. Software for 1040nr Do not include the amount from line 5 of the Form 8615 being completed. Software for 1040nr Example. Software for 1040nr Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Software for 1040nr 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. Software for 1040nr Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Software for 1040nr Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Software for 1040nr Other children's information not available. Software for 1040nr   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. Software for 1040nr See Parent's return information not known timely , earlier. Software for 1040nr Line 11 (tentative tax). Software for 1040nr   Subtract line 10 from line 9 and enter the result on this line. Software for 1040nr This is the tentative tax. Software for 1040nr   If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Software for 1040nr Also skip the discussion for lines 12a and 12b that follows. Software for 1040nr Lines 12a and 12b (dividing the tentative tax). Software for 1040nr   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. Software for 1040nr This is done on lines 12a, 12b, and 13. Software for 1040nr Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Software for 1040nr Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. Software for 1040nr Example. Software for 1040nr In the earlier example under Line 7 (net unearned income of other children), Sharon's Form 8615 shows $1,600 on line 7. Software for 1040nr The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). Software for 1040nr The decimal on line 12b is  . Software for 1040nr 333, figured as follows and rounded to three places. Software for 1040nr   $800 = . Software for 1040nr 333     $2,400   Step 3. Software for 1040nr 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. Software for 1040nr This is the child's tax. Software for 1040nr It is figured on Form 8615, lines 14 through 18. Software for 1040nr Alternative minimum tax. Software for 1040nr   A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. Software for 1040nr See Alternative Minimum Tax (AMT) in chapter 30. Software for 1040nr    For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. Software for 1040nr 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. Software for 1040nr Prev  Up  Next   Home   More Online Publications