What Is the Kiddie Tax?

The “kiddie tax” is a term used to describe a set of tax rules in the United States that apply to unearned income of certain children. It is designed to prevent parents from shifting investment income to their children to take advantage of lower tax rates. The kiddie tax rules were implemented to ensure that investment income received by children is taxed at the parents’ tax rate, which is often higher, rather than at the child’s typically lower tax rate.

Age and Income Thresholds

The primary consideration is the age of the child and their dependency status. The kiddie tax typically applies to children who are under a certain age (which can vary over time) and are considered dependents of their parents for tax purposes. As of my last knowledge update in September 2021, the age threshold was generally 18, but it could extend to 19-24 if the child was a full-time student. Understanding whether a child falls within the age and dependency criteria is crucial in determining whether the kiddie tax applies.

Misjudging the child’s age or dependency status can lead to mistakes. The kiddie tax rules are based on specific age and dependency criteria, which can change over time. It’s important to correctly determine whether the child falls within the age range and meets the dependency requirements.

The Kiddie Tax Applies to a Child’s Unearned Income

The second key consideration is the nature of the child’s income. The kiddie tax specifically applies to unearned income, which includes income from investments like dividends, interest, capital gains, and certain other passive sources. Earned income, such as wages from a job, is generally not subject to the kiddie tax. Therefore, you need to differentiate between a child’s earned and unearned income to determine if the kiddie tax rules come into play. To navigate the kiddie tax, it’s essential to understand both the age and dependency status of the child and the types of income they receive. Tax laws can change over time, so always consult the most current IRS guidelines or seek advice from a tax professional for the latest information and how it may apply to your specific situation. (206) 838-3800 — info@ygacpa.com

Under the kiddie tax rules, the child’s unearned income above a certain threshold (generally a small amount) is subject to the parents’ tax rate.

The first portion of unearned income may be taxed at the child’s rate, but any amount above the threshold is subject to the parent’s rate. Some taxpayers may make mistakes in calculating the kiddie tax itself. The kiddie tax typically applies to the child’s unearned income above a certain threshold. Parents need to calculate this threshold and ensure they are accurately applying the parent’s tax rate to the child’s income above that threshold.

The Kiddie Tax Rules Have Some Exceptions and Complex Provisions

It’s essential to consult with a tax professional (206) 838-3800 — info@ygacpa.com or refer to the latest tax laws for the most accurate and up-to-date information. The kiddie tax rules have various exceptions and complex provisions. Some taxpayers may not be aware of these exceptions or may misunderstand how they apply. For example, certain types of income, like tax-exempt interest, may not be subject to the kiddie tax. It’s important to carefully review the tax law or consult with a tax professional to determine if any exceptions apply.

The parent’s rate for the kiddie tax is often the rate at which the parents are taxed.

This can include both federal and state income tax rates. Some parents may assume that their highest marginal tax rate applies to all of the child’s unearned income, which is not always the case. The kiddie tax uses a specific formula to determine the portion of the child’s income subject to the parent’s rate. It’s crucial to understand how this calculation works.

The kiddie tax calculations are reported on the child’s tax return using IRS Form 8615.

Filing the wrong forms or failing to report the kiddie tax correctly is a common error. Parents or guardians should use IRS Form 8615 to calculate and report the kiddie tax. Failing to do so could result in errors in the tax return.

Tax Laws Change, and Thresholds, Rates, and Rules Related to the Kiddie Tax Can Change

To avoid these mistakes and ensure accurate compliance with the kiddie tax rules, it’s advisable to consult the most current IRS guidelines or work with a tax professional who can provide guidance based on the latest tax laws and regulations. Tax laws can be complex, so seeking expert advice can help prevent errors and potential penalties.