How to resolve ProConnect Tax diagnostic Ref 826 - Form 8615 must be filed

This article will help resolve the following diagnostic for Form 8615, Tax for Certain Children Who Have Unearned Income:

• Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,100 is required for this taxpayer age with investment income of $(amount). (ref #826)

For calculating kiddie tax, investment income is defined as all gross income other than earned income. Earned income, for this purpose, is defined in Internal Revenue Code Section 911(d)(2) and is essentially wages and self-employment income. Anything else included in gross income (1040, Line 22), is considered unearned income, and subject to the kiddie tax. This means unemployment is considered investment income for the kiddie tax.

Certain income including Other Income and Business Income may be included in this calculation.

Resources from Form 8615 instructions

Investment income

Per Form 8615 instructions, investment income includes:

• All taxable income other than earned income.
• Taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc.
• Taxable Social Security benefits, pension and annuity income, and income (other than earned income) received as the beneficiary of a trust.

Earned income

As defined on Form 8615, instructions page 2:

• Earned income includes wages, tips, and other payments received for personal services performed. Generally, it is the total of the amounts reported on Form 1040, Lines 7, 12, or 18; Form 1040A, Line 7; or Form 1040NR, Lines 8, 13 or 19.

Follow these steps for Other Income:

1. From the Input Return tab, go to Income ⮕ SS Benefits, Alimony, Misc. Income.
2. Scroll down to Alimony and Other Income.
3. Locate and enter in Other income (Click on button to expand). 
   • The formula for computing investment income is: Total income minus the sums of Lines 7, 12, and 18 of Form 1040.
   • The Other Income would be considered investment income, and if investment income exceeds $2,100, the form must be filed.  

If you don't consider Other Income to be investment income, adjust it as follows:

1. From the Input Return tab, go to Taxes ⮕ Children Under 18 (8615).
2. Scroll down to the Child's Information subsection.
3. Enter the adjustment in Investment income [A].

Follow these steps for Business Income:

1. From the Input Return tab, go to Income ⮕ Business Income (Sch C).
2. Scroll down to the Other Information section.
3. By selecting the Not subject to self-employment tax box, you are electing to exclude this income from the calculation of earned income, which in turn treats it as unearned income.

To treat this as earned income for Form 8615:

1. From the Input Return tab, go to Taxes ⮕ Children Under 18 (8615).
2. Scroll down to the Child's Information subsection.
3. Enter the adjustment in Investment income [A].

This diagnostic will also appear if:

• The date of birth isn't listed for the taxpayer on Client Information.
• If the occupation is listed as Student on Client Information.
• If the parent information is missing on Certain Children (8615) (first name, last name, Social Security, and filing status).
• The threshold amount in previous years varies; the threshold was increased to more than $2,100 for TY2016.