Kiddie Tax

What is a kiddie tax?

The kiddie tax is a special Internal Revenue Service (IRS) rule that looks to keep certain taxpayers from staying away from taxes by giving investments to their children. The kiddie tax is collected on a child's unearned income that is derived from sources unrelated to employment, like interest payments and dividends. For the motivations behind this tax, a child is defined as being younger than 18, or younger than 24 if a full-time student.

More profound definition

The kiddie tax was first presented in Tax Reform Act of 1986, and the rules were refreshed in 2005. The principle behind the tax was to close a loophole by which parents had the option to give investments to their children and reduce their own tax liabilities. The kiddie tax expects that a child's unearned income over a certain threshold is taxed at the marginal rate of the parent with the greater income.
The threshold at which this tax kicks in is $2,100 for 2017. Any income above $6,300 earned by a child through parttime employment is taxed separately.
At the point when a child's unearned income is greater than $2,100, parents have two options for filing tax returns. They can file a child's tax return or they can remember the child's income for their own return. In the event that the child's income surpasses $10,500, the law expects that a separate tax return be filed for the child. Aside from this, there are several different conditions that might command that a return is filed for the child, including age and cost of support.

Kiddie tax models

Parents frequently invest money or purchase stocks in their child's name determined to put something aside for the child's education. This has the benefit that the investments are in the child's name would it be a good idea for anything happen to the parents. When unearned income surpasses $2,100, parents have the decision of filing separately or jointly. Before choosing, it's smart to compare the taxes due utilizing IRS forms 8615 and 8814 and figure out which is best. Independent of the approach, the tax is constantly paid by the child.

Features

• All unearned income over the threshold is taxed at the parent's marginal income tax rate as opposed to the lower child's tax rate.
• It applies to all children who are 18 years old or under — or dependent full-time students between the ages of 19 and 24.
• The kiddie tax applies to most unearned income that a child gets and applies to no salary or wages.
• In 2022, unearned income under $1,150 meets all requirements for the standard deduction under kiddie tax law.
• The kiddie tax keeps parents from staying away from taxes by transferring large gifts of stock.