Rules and Regulations for Investing with Kids

Tax Information and Limitations for Kids Investing in ROTH IRAs, Stocks, Bonds, and Money Markets

Investing is a great way to help kids learn responsibility and money management skills that will help them as adults. However, you may wonder what is the best way to introduce your children to the financial world, and what are the rules and regulations that you will need to follow? Kids’ investing is really not that difficult, and it can provide them with financial stability when they grow up, pay for their college education, or even help them to buy their first home. This article will cover the basics rules and regulations about investments for kids under the age of 18. It will go over what tax rules you need to be aware of, and what investment limitations are in place.

Tax Rules

The first concerns that you have probably have to deal with the IRS and taxes. Investment income earned by your child will be taxed differently based on the amount that is earned. If the child is under the age of 14 and earns less than $800 from investment activity, then you don’t have to file a tax return for them. However, if they earn over $800 in investment income you will have to file a separate income tax return for your child. For investment income between $800 and $1,399 the income will be taxed at a reduced child tax rate. However, once the amount exceeds $1,400, the income is taxed at the adult rate, which can be as high as 35%. This tax rate will depend on the amount of money earned through the investment activity, as well as how much the child’s parents earned. If your child earns over $1,400 in investment income then they will need to fill out and file IRS Form 8615. This form can also be filled out to determine weather their investment income should be claimed on your income tax return, or on your child’s income tax return. If you, or your tax professional, decide to report the investment income on your tax return and the child’s other income is less than $750, then you will need to fill out and file form 8814 with your federal income tax return, and your child won’t need to file a tax return or a form 8815. It is recommended that you run your tax return both ways to see which one generates the best tax liability scenario.