The Ins and Outs of the Kiddie Tax: Everything You Need to Know

If you are a parent, grandparent or a guardian, you must be aware of the tax implications that come along with gifting assets to a child. To help you navigate through these complexities, we present to you the “Kiddie tax”.

What is it? How does it work? Who does it apply to? Keep reading to find answers to these and many more questions!

The term Kiddie tax refers to a set of tax rules that are applied to investment and unearned income earned by minor children in the United States. It is designed to prevent parents from shifting large sums of money to their children to avoid paying higher taxes.

Kiddie tax rules are part of the U.S. tax code, and were first introduced in 1986 as part of the Tax Reform Act. Under this rule, a portion of a child’s unearned income is taxed at the parent’s marginal tax rate, which could be higher than the tax rate on the child’s income.

The Kiddie tax applies to children who are under age 18 at the end of the tax year, or are full-time students under the age of 24, whose earned income is less than one-half of their total support for the year. It applies to unearned income, such as interest, dividends, and capital gains, that exceed certain thresholds.

The unearned income of a child that is subject to Kiddie tax is taxed at the parent’s marginal rate for federal income tax purposes. The threshold amounts for the 2019 and 2020 tax years are:

The Kiddie tax applies to children who meet the following criteria:

• The child is under age 18 at the end of the tax year, or is a full-time student under the age of 24 whose earned income is less than half of their total support for the year.
• The child has more than $2,200 in unearned income for the tax year (as of 2019 and 2020).
• The child does not file a joint return with their spouse.

If the child meets all of the above criteria, then the Kiddie tax will be applicable.

If the child does not have any earned income, the Kiddie tax will come into play if their unearned income exceeds $2,200 per year. The excess amount will be taxed at the parent’s marginal tax rate.

Earned income is income that is earned through employment or self-employment. Examples include wages, salaries, tips, business income, and professional fees. Unearned income includes income from investments, such as interest, dividends, and capital gains, as well as income from trusts and estates.

Yes, there are certain exemptions to the Kiddie tax.

One exception applies to children who have a net-loss from their investments. In such cases, their net-loss will be carried forward to future years and offset against their taxable gains.

The second exception applies to children who have investment income and are married and filing jointly. In such cases, the Kiddie tax will not apply.

The purpose of the Kiddie tax is to prevent parents from shifting large sums of money to their children in order to avoid paying higher taxes. It is also designed to ensure that children pay taxes at a rate that is more consistent with their income levels and abilities to pay.

The Kiddie tax helps to maintain the integrity of the U.S. tax system and ensures that everyone pays their fair share of taxes.

The Kiddie tax is calculated using the parent’s marginal tax rate for federal income tax purposes. The rates for 2020 are:

The Kiddie tax is calculated using the marginal tax rate of the parent or parents for federal income tax purposes. The parent’s income is combined with the child’s unearned income that is subject to the Kiddie tax. This combined income is then taxed at the parent’s marginal tax rate.

For example, let’s say a child has $3,000 in unearned income subject to Kiddie tax and their parent is in the 22% tax bracket. The Kiddie tax would apply to $800 ($3,000 – $2,200 threshold), which would be taxed at the parent’s marginal rate of 22%. The child would owe $176 in federal income taxes.

While it may not be possible to completely avoid the Kiddie tax, there are some strategies that can help you minimize its impact:

• Transfer assets to a 529 plan, which can grow tax-free and be withdrawn free of taxes, if used for qualified educational expenses.
• Invest in municipal bonds, which are generally tax-free or offer lower tax rates.
• Delay your child’s investments until after they turn 18 or become independent.
• Set up a trust, which can help you transfer assets and reduce your estate tax liability, while still providing for your children.

Unearned income is income that is not earned through employment or self-employment. It includes income from investments, such as interest, dividends, and capital gains, as well as income from trusts and estates.

If your child is under age 18 at the end of the tax year, or is a full-time student under the age of 24 whose earned income is less than half of their total support for the year, and has more than $2,200 in unearned income, then their unearned income is subject to Kiddie tax.

Yes, under the Kiddie tax rules, your child’s unearned income can be taxed at a higher rate than your income, if their unearned income exceeds the threshold amount and is subject to Kiddie tax.

There are two exceptions to the Kiddie tax. The first applies to children who have a net-loss from their investments. The second applies to children who have investment income and are married and filing jointly.

The Kiddie tax is calculated using the marginal tax rate of the parent or parents for federal income tax purposes. The parent’s income is combined with the child’s unearned income that is subject to the Kiddie tax. This combined income is then taxed at the parent’s marginal tax rate.

The Kiddie tax can be a complicated topic, but it is essential for parents and guardians to understand the rules and regulations that apply to their children’s unearned income. By understanding the Kiddie tax, you can not only avoid potential tax penalties but also ensure that your children pay taxes at a rate that is more consistent with their income levels and abilities to pay.