Advantages and Disadvantages of the Election
Making the election can have certain advantages and disadvantages:
Disadvantages
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Rates may be higher - By using Form 8814, the child's income may be taxed at a higher rate on the parent’s return than it would be on the child's own return. Including the child’s income could increase the parent’s income to the point that it bumps the parents into the next higher tax bracket.
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Deductions lost - By making the Form 8814 election, parents can’t take certain deductions the child would be entitled to on his or her return. For instance, the parents can’t
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Take the higher standard deduction if the child is blind
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Get a deduction for an interest forfeiture penalty on early withdrawal from the child's savings accounts, and
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Deduct certain itemized deductions (such as the child's investment expenses (in years when Tier 2 miscellaneous deductions aren’t suspended) or charitable contributions).
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Alternative Minimum Tax - If the child received tax-exempt interest from a private activity bond that is a tax preference item for alternative minimum tax (AMT) purposes, the parents must include it with their own tax preference items when figuring their AMT.
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3.8% Surtax on Net Investment Income (NII) – Electing to include the child’s investment income on the parents’ return could push the parents’ modified AGI over the threshold at which the NII tax applies. If the parents are already subject to the NII tax, adding the child’s investment income may increase the amount of NII tax the parents will pay.
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Reduced Deductions or Credits - The parent’s increased adjusted gross income due to the child’s income may reduce certain deductions or credits on their return, including:
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IRA deductions
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Itemized deductions for medical expenses, casualty losses (only those in federally declared disaster areas for 2018-2025 are allowed), and in years when not suspended, certain miscellaneous expenses
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Total itemized deductions (in years when the overall itemized deduction phaseout applies)
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Credit for child and dependent care expenses
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Saver’s credit
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Child tax credit
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Personal exemptions (in years when exemption allowances are deductible and the amount must be phased due to “high” income), and
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The earned income credit.
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Possible Advantages
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Deductible Investment Interest - If Form 8814 is used, a child's investment income is considered the parent’s investment income. To figure the parent’s limit on deductible investment interest expense, add the child’s investment income to the parents. However, if the child received capital gain distributions or Alaska Permanent Fund dividends, that income doesn’t count as investment income.
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Simplification and Cost Savings – Including the child’s income on the parent’s return eliminates the need to file a separate return for the child and may result in less overall tax preparation fees to the family.