SEA-08-20, September 10, 2008 (Updated 9/11/08 to clarify PFD amount) SEATTLE — Don’t forget that the Alaska Permanent Fund Dividend (PFD) is taxable income on Federal income tax returns. Be sure to set aside enough to cover your tax bill, or consider making an estimated tax payment when you get your PFD. For more information on how to report the Alaska PFD income on the Federal tax return contact the IRS at 1-(800)-829-1040 or visit the the IRS web site at IRS.gov and input the key words in quotes: "Around the Nation Alaska" in the top right search engine. The Internal Revenue Service reminds Alaskans that the Alaska PFD (including the one-time addition of the $1,200 Resource Rebate) is taxable income for both adults and children, and must be reported on a Federal income tax return. Because of the size of the PFD this year, every child under 18 who is a dependent will be required to file a tax return, and will be affected by the “kiddie tax” rules. Many older children may be affected as well. Special Tax Rules for Children Special tax rules apply to children under age 18, and — beginning in 2008 — certain older children who receive more than $1,800 of unearned income, including the PFD and Native Corporation Dividends. Some people refer to this as the “kiddie tax.” Beginning in 2008, the age of children whose unearned income is taxed at their parent’s rate increased. For children under age 18 and certain older children (described below), unearned income over $1,800 is taxed at the parent’s rate. These special tax rules apply to children who meet all of the following conditions: The child had more than $1,800 of unearned income (defined below). The child is required to file a tax return. The child either: Was under age 18 at the end of 2008, Was age 18 at the end of 2008 and did not have earned income that was more than half of the child’s support, or Was over age 18 and under age 24 at the end of 2008 and was a full-time student who did not have earned income that was more than half of the child’s support. (Full-time Student and Support are defined below.) At least one of the child’s parents was alive at the end of 2008. The child does not file a joint return for 2008. Unearned Income: For this purpose, unearned income includes taxable interest, ordinary dividends (including taxable Native Corporation Dividends), capital gains (including capital gains distributions), rents, royalties, taxable social security benefits, pension and annuity income and income received as the beneficiary of a trust. Support: 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. To figure your child’s support, count support provided by you, your child, and others. However, a scholarship received by your child is not considered support if your child is a full-time student. Full-time Student: A student is a child who during any part of five 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. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Frequently Asked Questions: 1. My child’s only income is the Permanent Fund Dividend Does she really need to file a federal tax return? Yes, assuming you are able to claim your child as a dependent. You can file a separate Form 1040A or Form 1040 for your child, and attach Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800 to figure the tax. Form 8615 will figure the tax on the first $1,800 of unearned income at the child’s rate, and the tax at the parent’s rate for the unearned income over $1,800. Most parents can also choose to use Form 8814, Parent's Election to Report Child's Interest and Dividends with their own tax return, and pay their child’s tax along with their own. However, in some cases this can result in the family paying more tax, or receiving a smaller refund, than if a separate return was filed for the child. You should figure it both ways to see which works out better for your family. 2. Can anyone use Form 8814 to pay their child’s tax? No. If your child meets any of the following conditions, they MUST file a separate tax return, and use Form 8615 to calculate their tax: Received earned income (income from work) Received income from sources other than the Alaska Permanent Fund Dividend, interest, dividends, and capital gains distributions Gross income was $9,000 or more Estimated tax payments were made for the child Federal income tax was withheld from the child’s income For example, if your child had income from a job, or some stock held for the child was sold in 2008, a separate return would be required. 3. My child is 18 years old. Do I have to worry about the “kiddie tax?” Maybe. Starting in 2008, the rules changed to include some older children in the group covered by these “kiddie tax” rules. Unearned income over $1,800 is taxed at the parents’ rate for any child who: Is required to file a return, Was under age 18 at the end of 2008, Was age 18 at the end of 2008 and did not have earned income that was more than half of the child’s support, or Was over age 18 and under age 24 at the end of 2008 and was a full-time student who did not have earned income that was more than half of the child’s support. For example, let’s say your son is 18 years old and working full-time. He earned $20,000, and his total support amounted to about $5,000 over the year. Whether or not you could claim your son as a dependent on your tax return, he has enough income to require a tax return. Because he is 18 and his earned income is more than half of his total support, he is not affected by the “kiddie tax” rules, and should file his own return without adding Form 8615. But let’s say your son is 18, still in school and only earned $2,000 at his summer job. You can claim him as a dependent on your tax return, and his total support amounted to about $5,000 over the year. He would have a requirement to file but his earned income is less than half of his support. In this case, your son would be affected by the “kiddie tax” rules and need to use Form 8615 along with his Form 1040 or 1040A. Attaching Form 8814 to your own return wouldn’t be an option, because your son had earned income. For kids over age 18 and under age 24, the “kiddie tax” rules will only apply if the child is a full-time student, in addition to having earned income that amounts to less than half of the child’s support. Estimated Tax for Individuals 1. Am I required to make an estimated tax payment on my Alaska Permanent Fund? You would be required to make a payment if you meet the general rules below. However, you can choose to make estimated tax payments to cover your taxes on the Alaska PFD by making a payment before January 15, 2009. General Rule: You must pay estimated tax for 2008 if both of the following apply: You expect to owe at least $1,000 in tax for 2008, after subtracting your withholding and credits. You expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your 2008 tax return, or 100% of the tax shown on your 2007 tax return. Your 2007 tax return must cover all 12 months. Note: These percentages may be different if you are a farmer, fisherman, or higher income taxpayer. See Special Rules in Publication 505, Tax Withholding and Estimated Tax. 2. How do I report the estimated payments I have made when I file my taxes at the end of the year? Take credit for all your estimated tax payments in the "Payments" section of Form 1040 or Form 1040A. The Bottom Line 1. How much is the tax on the PFD going to be? There isn’t just one answer to that question. The total tax is going to depend on your child’s total income, and if the “kiddie tax” rules apply, on the parent’s income as well. Examples: But here are some examples to help you plan. Remember, these are just estimates, based on a $3,269 PFD and the circumstances given in the examples. Scenario A: Herman is 5 years old. His only income is the Alaska Permanent Fund Dividend of $3,269. His parents are filing a joint return and have wages of $23,600 plus their own PFDs. If Herman files a separate return with Form 8615: Refund/Tax due on Herman’s return = $241 tax due Refund/Tax on Herman’s parents’ return = $1,225 refund Total Family net Refund/Tax = $ 984 refund Herman’s parents’ return with Form 8814: Refund /Tax on Herman’s parents’ return (total family refund/tax) = $745 refund Using Form 8814 impacts the Earned Income Credit that Herman’s parents can receive, reducing the total refund for the family. In Scenario A, Herman’s parents want to do a separate return for Herman, and use Form 8615 to figure his tax separately. Scenario B: Same facts, except Herman’s parents have wages of $53,600. Tax on Herman’s return = $316 tax due Tax on Herman’s parents’ return = $4,006 tax due Total Family net Refund/Tax = $4,322 tax due Herman’s parents’ return with Form 8814: Refund/Tax on Herman’s parents’ return (total family refund/tax) = $4,321 At the higher income level, with no Earned Income Credit to lose, Herman’s parents save $1 by using Form 8814. Scenario C: Lizzie is 19 and a full-time student. She works part-time and made $3,000. Her total support for the year amounted to $10,000. Her parents claim Lizzie as a dependent. Lizzie must file a separate return and use Form 8615 to figure her tax under the “kiddie tax” rules. Her parents are filing a joint return and have wages of $53,600 plus their own PFDs. Tax on Lizzie’s return = $ 376 tax due Tax on Lizzie’s parents’ return = $5,006 tax due Total Family net Refund/Tax = $5,382 tax due Because Lizzie has earned income her parents cannot claim her income on their return using a form 8814. Lizzie’s earned income is not more than ½ of her support; therefore she is required to file a Form 8615. NOTE: The parents are no longer entitled to the Child Tax Credit because Lizzie is over the age of 17. Links: Publication 505 PDF, Tax Withholding and Estimated Tax (PDF) Form 1040-ES PDF, Estimated Tax for Individuals (PDF) Tax Topic 553, Tax on a Child's Investment Income
