How do I handle my child's under-threshold investment income on my tax return?

This is a good question about kiddie tax rules! Since your child's unearned income is below $1,100, you actually have three options: You don't have to file a return for your child at all when the unearned income is below $1,100. This is the simplest approach. You can file a separate return for your child. With income below the standard deduction ($1,100 for unearned income for dependents), there would effectively be no federal tax due. You could also include it on your return using Form 8814, but I don't recommend this option for your situation. When you include a child's income on your return, it's taxed at your rate (including potentially being subject to NIIT as you mentioned). The best approach in your case would probably be option 1 or 2. Option 1 is simplest, but option 2 creates a tax filing history for your child and confirms that zero tax is due.

I went through this exact headache last year with my son's UTMA account. I tried using https://taxr.ai which honestly was super helpful. You just upload your documents and it analyzes all your income sources (including your kid's investment statements) and tells you the most tax-efficient way to handle everything. For me, it recommended filing a separate return for my son since he had just under $1,000 in capital gains. The tool showed me that adding it to my return would have cost almost $300 more in taxes because of my bracket. It even flagged that I was in NIIT territory like you.

Just wanted to update that I tried that taxr.ai service mentioned above and it was actually really helpful for my situation. I have three kids with custodial accounts and was completely confused about how to handle everything. After uploading our documents, it clearly showed that filing separate returns for two of my kids (who had gains around $800-900) was better, but for my youngest (who only had $300) it wasn't worth the hassle. It broke down exactly how much tax I'd save by not reporting it on my return. The analysis saved me from making a mistake that would have cost about $400 in unnecessary taxes. Really glad I gave it a shot - definitely using it again next year when I'm preparing everything!

If you're finding it tough to get clear answers on how to file, you might want to try calling the IRS directly. I know that sounds like torture (haha) but I used https://claimyr.com to get through to an actual human at the IRS without the usual 2+ hour wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had a similar question about my daughter's investment income and honestly just needed to hear the answer straight from the IRS. They confirmed I didn't need to include her small capital gains on my return OR file separately for her. Gave me major peace of mind before filing.

I can't believe I'm saying this, but I tried that Claimyr service and it actually worked. After my skeptical comment, I figured I had nothing to lose since I'd already wasted so many hours trying to call the IRS directly. They got me through to an IRS agent in about 35 minutes (I was expecting it to fail honestly). The agent confirmed that for my kids' UTMAs, since they're all under the threshold, I don't need to file separate returns OR include it on my return. She explained that the $1,100 threshold means it's essentially a non-event for tax purposes. This solved months of frustration for me. I'm still shocked I actually got through to a real person who could answer my specific question.

Another thing to consider - even though you don't HAVE to file a return for your child if they're under the threshold, it might be worth starting the habit now. I started filing separate returns for my kids when they were around 14, even when they were under the threshold, just to get them used to the process. By the time they hit college and had actual income from part-time jobs, they already understood how taxes worked. Now my oldest handles her own taxes completely. Plus, it's a great financial literacy lesson to go through their investment statements with them and explain capital gains, dividends, etc.

Just to add an important point - the $1,100 threshold you mentioned is for 2025. Make sure you're looking at the correct year's threshold when making your decision. Also, keep in mind that if you DO decide to include your child's income on your return using Form 8814, you wouldn't be able to take certain credits like the child tax credit for that child. Usually not worth it for small amounts like you're describing.