Parents would pay, and claim a deduction for interest on money borrowed from the trust. The trustee could then use the interest received to pay the educational expenses of the children. For trusts established before this date, income will be taxed at the child's rate. As a result, more parents will have to file returns for their children. Failure to do so may subject the parent to penalties.
Earned income is any amount received as pay for work done.
The following are rules that apply to the taxation of children's income under age 14. Figure 1 provides examples of the computation of the tax liability for children with unearned income. Figure 2 provides examples for the computation of the child's tax liability where there is both earned and unearned income. The growing tax burden on families is an issue that Congress is presently discussing. Currently the only relief to taxpayers with a number of children comes from the child and dependent care credit.