Revenue Administrative Bulletin 1990-22

Approved: July 12, 1990

INCOME TAX TREATMENT OF A CHILD'S UNEARNED INCOME

RAB-90-22. This bulletin describes the treatment of certain unearned income of a child whose parent has elected to report that income on the parent's federal form 1040.

Background

The parent of a child with unearned income can elect to include that income on the parent's federal income tax return. Such an election increases the parent's Michigan taxable income and affects household income for homestead property tax credit purposes.

Federal Treatment

Section l(i)(7) of the Internal Revenue Code (IRC) provides for an election by which parents may include unearned income of a child on the parent's return if:

1. The child has not attained age 14 before the close of the tax year (e.g., December 31),
2. The child has gross income for the taxable year only from interest and dividends,
3. The gross income is more than $500 and less than $5000, and
4. No estimated payments for the year are made in the name and account number of the child, and no amount has been deducted or withheld.

If the parent makes such an election, the child shall be treated as having no gross income for such year and shall not be required to file a return under IRC section 6012.

If a parent makes the election under IRC section l(i)(7), the gross income of each child to whom such election applies (to the extent the gross income of such child exceeds $1,000) shall be included in the parent's gross income for the taxable year.

Michigan Treatment

Taxable Income

MCL 206.30(l); MSA 7.557(130) states that taxable income "for a person other than a corporation, estate, or trust, means adjusted gross income as defined in the internal revenue code subject to the following adjustments . . . ."

The statute does not authorize a subtraction for the interest income of a child that is reported on the parent's return. Thus, if a child's interest and dividend income is included in his or her parent's adjusted gross income (AGI) for federal tax purposes, the child's income will be included in the parent's Michigan taxable income.

In this case, the child will not have to file a MI-1040 since the child has no reportable AGI.

If the election under IRC section l(i)(7) is not made by the parents and the child's AGI is greater than $1,500, the child would have to file a MI-1040 for the tax year.

Household Income

MCL 206.508(4); MSA 7.557(1508)(4) defines household income as "all income received by all persons of a household in a tax year while members of a household. See Revenue Administrative Bulletin 1988-46", Household Income Defined.

MCL 206.510(l); MSA 7.557(1510)(1) defines income as "the sum of federal adjusted gross income as defined in the internal revenue code plus all income specifically excluded or exempt from the computations of federal adjusted gross income . . . ."

Therefore, household income must include the child's total interest and dividend income if the parents have elected to follow IRC section l(i)(7).