Q: My question is one of curiosity: Why does the government set the reporting of interest paid to dependent children at the low level of $1,000? Every year I fill out five tax returns for my children indicating that each had a little over $1,000 interest income and therefore owes no taxes. And every year someone at IRS has to spend time checking this zero return and sending forms for the next year. Why is the government spending so much effort just to get this useless information?

A: If you're coming up with zero tax liability for each child, then you may not be preparing the tax returns properly. I assume that you are claiming these children as your dependents on your own tax return -- which means that you must follow special instructions in the preparation of their returns.

The first rule is that each child must file on the long Form 1040, and may not use either the 1040A or the 1040EZ. Then -- because you say the interest is their only income and none of them have "earned" income of any kind -- the child may not use the zero-bracket amount, but must itemize deductions on Schedule A.

Because the children are unlikely to have any itemized deductions, you must add $2,300 to the interest income to get the amount of taxable income you carry to the tax table. If each child has, say, $1,100 in interest income for 1984 and no itemized deductions, he has a tax liability of $12.

I have to agree with your basic premise: This seems like a terrible waste of government time and money -- in addition to wasting your time preparing the returns. I suspect it costs the IRS more than $12 a year to keep a taxpayer on the rolls.

Now to answer your first question, the $1,000 minimum was established because -- until this year, when indexing changes the numbers -- that is the amount of a personal exemption. And, to be fair, no matter where the minimum reporting level was set, there would always be marginal taxpayers for whom the same question would arise.

Q: I retired in May 1984 at the age of 60. I receive a monthly check from my company pension plan, plus a second check that the company will be sending for the next four years. This second check was an incentive for early retirement; it is labeled "wages" and FICA is deducted, as well as federal and state income tax. Am I still eligible to deposit money in an IRA? I have had "yes" and "no" answers elsewhere.

A: The correct answer is "no." (Of course you are eligible for an IRA for wages received up to your retirement in May.) The second check you receive is really a form of deferred compensation, and that's why Social Security tax is withheld.

But it is not compensation that qualifies you for an IRA; for that purpose, the compensation must be received for work performed currently, rather than for services performed earlier. Deferred compensation and pension payments are specifically excluded from IRA-qualified income.

Q: In 1984 my 8-year-old son received a gift of some stock that was registered in his name under the Virginia Uniform Gifts to Minors Act. But he had no Social Security number, so we used my wife's number instead. Now the 1099 reporting the dividends on that stock also shows my wife's SSN. If we don't report the dividends on our return, will the IRS pick up the omission? Would it be better to show the dividends on our Schedule B with an explanation, and not include the amount in the total?

A: I suggest you simply omit the dividends from your joint return; and because you said it was your son's only income and under $1,000, you won't have to file a return for him either. The IRS may very well spot the omission in a comparison check with the report received from the payer -- but you have time then to explain the problem, in the response section of their form letter query.

Meanwhile, get down to the nearest Social Security office posthaste with your son's birth certificate and apply for his own Social Security number. As soon as you get it, send it to the company whose stock he has (or the transfer agent) and have your son's Social Security number substituted for your wife's, to avoid this problem in future years.