Image Source: Canva Pro
The Kiddie Tax is a tax provision in the United States that applies to the unearned income of certain children, primarily aimed at preventing parents from shifting income to their children to take advantage of lower tax rates. It affects children under the age of 19 (or under 24 if they are full-time students) who have significant unearned income, such as dividends, interest, or capital gains.
What is the Kiddie Tax?
The Kiddie Tax ensures that a child’s unearned income is taxed at their parents’ marginal tax rates rather than at the child’s lower tax rate. This is designed to close the loophole that allowed families to avoid higher tax brackets by transferring assets or income-generating investments to their children.
Key Features of the Kiddie Tax:
- Applicable Age: The Kiddie Tax applies to children under 19 years of age or under 24 if they are full-time students.
- Unearned Income: The tax applies primarily to unearned income, such as dividends, interest, and capital gains.
- Threshold: For the tax year 2023, the first $1,250 of unearned income is tax-free. The next $1,250 is taxed at the child’s rate, and any amount over $2,500 is taxed at the parents’ tax rate.
The Kiddie Tax is an important consideration for families with children who have unearned income, ensuring that such income is taxed appropriately. Understanding the rules and thresholds can help parents manage their tax liabilities and make informed financial decisions.
Frequently Asked Questions: Kiddie Tax
What types of income are considered unearned income?
Unearned income includes dividends, interest, rental income, capital gains, and any other income not earned through work.
How do I know if my child is subject to the Kiddie Tax?
If your child is under 19 (or under 24 if a full-time student) and has unearned income exceeding the annual threshold, the Kiddie Tax applies
What are the current income thresholds for the Kiddie Tax?
For the tax year 2023, the first $1,250 of unearned income is tax-free, the next $1,250 is taxed at the child’s tax rate, and any unearned income over $2,500 is taxed at the parents’ tax rate.
Can I avoid the Kiddie Tax by gifting investments to my child?
No, the Kiddie Tax applies regardless of whether the income-generating assets are owned by the child or gifted to them by a parent.
How is the Kiddie Tax reported on tax returns?
If your child is subject to the Kiddie Tax, you must report the unearned income on Form 8615, which is attached to the child’s tax return.
What happens if the child’s unearned income is below the threshold?
If a child’s unearned income is below the $1,250 threshold, they do not need to file a tax return for that income. However, if their earned income exceeds the filing requirement, a return must be filed.
Does the Kiddie Tax apply to all children?
The Kiddie Tax specifically targets children under age 19 (or under 24 for full-time students) with significant unearned income. It does not apply to adults or children over these age limits.
Are there any exceptions to the Kiddie Tax?
Certain exceptions exist, such as if the child has earned income greater than half of their support costs, they may not be subject to the Kiddie Tax.
