Election to Include Child’s Unearned Income — Addition Required

An addition to federal taxable income is required for taxpayers who elect to include a minor child's unearned income on their federal return. For federal purposes, unearned income in excess of a dependent's standard deduction, but less than twice that amount, is taxed at a special rate on a separate schedule and is not included in taxable income of the parent. For Oregon, this amount must be added to federal taxable income. The excess unearned income already included in the parent's federal taxable income requires no addition to the parent's return.

Example 1: Bob and Phyllis file a joint federal return for tax year 1997. Their son Ray has $1,700 interest income from a trust account. Bob and Phyllis elect to include Ray's unearned income in excess of the $650 exclusion on their 1997 federal return. For federal purposes, $650 is taxed at a special rate and $400 is included in taxable income. For Oregon, Bob and Phyllis must add $650 to federal taxable income. This is the $650 of Ray's unearned income that was taxed at the special federal rate. Since the remaining $400 is included in federal taxable income, no addition is required for this amount.

Example 2: Assume the same facts above, except that Ray's unearned income is only $750. For federal purposes, Bob and Phyllis exclude the first $650. The remaining $100 is taxed at the special federal rate. For Oregon, Bob and Phyllis must add $100 to federal taxable income.