You're confusing two things: filing requirement (which implies having to pay tax) and the threshold for "kiddie" tax rates. For 2012 if a dependent has nothing but unearned income the standard deduction is $950. Beyond that tax is due.

According to TurboTax for 2012, you are mistaken.

When I made a fake return for my daughter using the actual gains from her account, I entered a hypothetical fund sale that adjusted her unearned income just below & above $1900.

Below $1900, her tax was calculated using the "Qualified Dividends and Capital Gain Tax Worksheet" which resulted in no taxes.

Above $1900, her tax was calculated using Form 8615 which I linked in my earlier post which clearly subtracts $1900 from unearned income with instructions to stop if zero.

So, if I can deduce the rules, above $1900 of unearned income, her income would be taxed according to form 8615 which I believe is at my tax rate.

Below $1900, her income would be taxed as qualified dividends and long term gains which, since 2007, is 0% for those in the 10% & 15% brackets.

If you don't mind, could you point out where I'm wrong?

Thanks
-murray