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Filing taxes on funds is not EZ task

Question - Interest income of $650 or more requires 1040ALast fall I opened a mutual-fund account for my 14-year-old granddaughter, and she earned $150 in dividends. Does she have to pay taxes on this income? If so, can we get away with filing a 1040EZ because she's still a child?

Answer - The answer to your first question is easy.No, your granddaughter doesn't owe any taxes unless she had more than $650 in unearned income - meaning income from dividends and interest rather than wages (the threshold for unearned income rises to $700 this year).

But the answer to your second question is not "EZ."

The type of form you file has nothing to do with your age. What counts, among other things, are the source and amount of your in-come.

You can't use the 1040EZ if you have any income from dividends or capital gains, or more than $400 in interest income. If your granddaughter's dividend income tops $700 in 1998, she'll probably have to file Form 1040A.

If the fund pays a capital-gains distribution, she'll have to file the 1040 long form and a schedule D. She can always skip the lines that don't apply.

Question - We bought stock in Wendy's for our 14-year-old son and 6-year-old daughter, and they contribute their own money to buy more shares. Lately, however, my son has been saving for a Boy Scout trip, so his sister's holdings are catching up with his. Should we make up the difference?

Answer - Keep up with your investments on your son's behalf, but don't worry about his own.

Part of learning to manage money is setting priorities, and your children have made choices that make sense for them. Your son is obviously a thrifty young man. Even if his stock account is growing more slowly right now, he'll have a great time on the Boy Scout trip. And he'll have the satisfaction of knowing that he paid for it himself.

Because your daughter is younger, she has fewer choices when it comes to parceling out her money. But when she gets older and wants to save for space camp or a ski trip, the family books will balance.