Taxation of minor children

(a)

Application of trust rate schedule to net unearned income of minor children

Subsection (g) of section 1 of the Internal Revenue Code of 1986 (relating to certain unearned income of minor children taxed as if parent’s income) is amended— (1)by striking paragraphs (1), (3), and (5), (2)by redesignating paragraphs (4), (6), and (7) as paragraphs (3), (4), and (5), respectively, and (3)by inserting before paragraph (2) the following new paragraph:

(1)

In general

In the case of a child to whom this subsection applies, the tax imposed by this section shall be the sum of— (A)a tax computed at the rates and in the same manner as if this subsection had not been enacted on taxable income reduced by net unearned income, plus (B)the excess (if any) of the tax determined under subsection (e) on total taxable income over the tax determined under subsection (e) on taxable income reduced by net unearned income.

(b)

Expansion of parental election

Paragraph (5) of section 1(g) of such Code (as redesignated under subsection (a)) is amended to read as follows:

(5)

Election to claim income of child on parent’s return

(A)

In general

If the parent of any child to whom this subsection applies elects the application of subparagraph (B), such child— (i)shall be treated (other than for purposes of this paragraph)— (I)as having no gross income for such year, and (II)as not being entitled to any deductions or credits for such year, and (ii)shall not be required to file a return under section 6012 for such year. (B)

Income included on parent’s return

In the case of a parent making the election under this paragraph— (i)the gross income of each child to whom such election applies shall be included in such parent’s gross income for the taxable year, (ii)the deductions to which such child would be entitled without regard to such election shall be allowed to such parent but only to the extent the aggregate of such deductions does not exceed the gross income of such child, (iii)any estimated tax payment, and any amount which has been deducted and withheld under chapter 24, for such year that is made in the name and TIN of such child shall be treated as an estimated tax payment or as an amount deducted and withheld in the name and TIN of such parent for such year (including for purposes of section 31), and (iv)any interest which is an item of tax preference under section 57(a)(5) of the child shall be treated as an item of tax preference of such parent (and not of such child). (C)

Special rule for determining which parent may make election

For purposes of this paragraph, the parent of a child to whom this subsection applies who may make an election under this paragraph shall be— (i)in the case of parents who are not married (within the meaning of section 7703), the custodial parent (within the meaning of section 152(e)) of the child, and (ii)in the case of married individuals filing separately, the individual with the greater taxable income. (D)

Carryovers allowed

Subparagraph (A)(i)(II) shall not prohibit the carryover of any amount that the child would be entitled to carryover without regard to the election under this paragraph. (E)

Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph.

(c)

Conforming amendment

The heading for subsection (g) of section 1 of such Code is amended to read as follows:

(g)

Treatment of certain income of minor children

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2004.