Parents of young children might think Congress has done them a favor by allowing them to report a child's income on the parents' return, rather than hassling with a special tax form for the youngster. But think again.

The chance to report a child's income on your return is very restricted. You can do it only if your child is younger than age 14, his or her only income is from interest and dividends and the total is $8,500 or less. Even if you pass these tests, the prize isn't all that great.

You still have to fill out an extra form -- the 8814 -- to accompany your return. And the tax bill on the child's income could actually cost more than if the money were reported on the child's own return. The first $850 is tax-free and the next $850 is taxed at 10%; and the rest is taxed at the parents' rate, as high as 35%.

If part of your child's earnings come from capital gains distributions from mutual funds or qualified dividends, though, what would be taxed at 10% on the 8814 would be taxed at just 5% on his or her own return.

In fact, taking the shortcut could cost your family more money. Some federal tax breaks are restricted at higher income levels and, if you put the child's income on your return, it could add to the squeeze. Plus, showing the child's income on the parents' federal return could hike your family's state income tax bill.

If your child's income is high enough to be reported to the IRS, you're probably better off filing a separate return.

MORE: Kiplinger.com | Your Money | Taxes | Column

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