If you haven’t filed your taxes yet, don’t panic — but act fast.
Heard of the kiddie tax but aren’t sure what it means? Find out more at Bankrate.
What is a kiddie tax?
The kiddie tax is a special Internal Revenue Service (IRS) rule that seeks to prevent certain taxpayers from avoiding taxes by giving investments to their children. The kiddie tax is levied on a child’s unearned income that is derived from sources unrelated to employment, such as interest payments and dividends. For the purposes of this tax, a child is defined as being under the age of 18, or under the age of 24 if a full-time student.
The kiddie tax was first introduced in Tax Reform Act of 1986, and the rules were updated in 2005. The principle behind the tax was to close a loophole whereby parents were able to give investments to their children and reduce their own tax liabilities. The kiddie tax requires that a child’s unearned income above 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 part-time employment is taxed separately.
When a child’s unearned income is greater than $2,100, parents have two choices for filing tax returns. They can file a child’s tax return or they can include the child’s income on their own return. If the child’s income exceeds $10,500, the law requires that a separate tax return be filed for the child. Apart from this, there are several other conditions that may mandate that a return is filed for the child, including age and cost of support.
Kiddie tax examples
Parents often invest money or purchase stocks in their child’s name with the intention of saving for the child’s education. This has the benefit that the investments are in the child’s name should anything happen to the parents. Once unearned income exceeds $2,100, parents have the choice of filing separately or jointly. Before deciding, it’s a good idea to compare the taxes due using IRS forms 8615 and 8814 and determine which is best. Irrespective of the approach, the tax is always paid by the child.
Do you know how much kiddie tax your child needs to pay? Find out using our tax calculators.
More From Bankrate
4 min read Apr 19, 2022
Typically, taxpayers have two options: Take the itemized deductions or take the standard deduction.3 min read Apr 18, 2022
Regardless of what may cause a person to miss the tax-filing deadline, there are potential consequences.5 min read Apr 18, 2022
Applying for more time to file your taxes is easy. Just don’t put off paying your tax bill.3 min read Apr 15, 2022
The fast-approaching deadline for filing your 2021 taxes is April 18, 2022.2 min read Apr 11, 2022
There are seven tax brackets for most ordinary income: 10%, 12%, 22%, 24%, 32%, 35% and 37%.4 min read Apr 07, 2022
The credit was confusing even before Congress revamped it for 2021.7 min read Apr 01, 2022
Here’s how to use a Roth IRA to pay for your child’s college tuition.4 min read Mar 28, 2022
This popular tax break can be one of the trickiest.5 min read Mar 24, 2022