Tax Rules for Children with Investments Income Abroad

Tax Rules for Children with Investments Income Abroad

All Americans are required to file US taxes, whether they live in the States or abroad, or whether they’re adults or children. US tax filing rules are slightly different for children though.

American children with investments abroad are required to report their investment income (e.g. interest and dividends) if their total unearned income exceeds just $1,050 in a year.

If their income is from dividends and interest (including capital gain distributions) and is less than $10,500 however, it can be reported on their parent’s tax return if the parent elects to by filing IRS Form 8814 (Parents’ Election To Report Child’s Interest and Dividends). More information can be found in IRS Publication 929, Tax Rules for Children and Dependents.

Note that the same rules and thresholds apply whether an American child’s investments are in the US or abroad, or whether the child lives in the US or abroad. In short, the US tax system applies to all American citizens, and all their global income.

Tax may be payable on American children’s investment income if their total investment income exceeds $2,100 in a year. If so, they need to file IRS Form 1040 and also Form 8615 (Tax for Certain Children Who Have Unearned Income).

American children’s investments abroad may be liable to foreign income tax too, depending on the tax rules in the country where the investments are. Some countries tax all income arising in that country, while others tax all their residents’ income. All countries have different minimum tax thresholds too, so it’s important to check whether foreign tax may be due on investment income abroad by getting familiar with the foreign tax rules.

If both foreign tax and US tax is due on Americans children’s investment income abroad, when filing a US tax return it’s possible to claim the Foreign Tax Credit provision by filing IRS Form 1116. The Foreign Tax Credit allows Americans who pay foreign taxes to avoid paying tax twice on the same income by claiming US tax credits to the same value as the foreign taxes that they have paid.