The kiddie tax was introduced by The Tax Reform Act of 1986. It was set up to prevent parents from transferring wealth into their children’s names for the sake of reducing tax liability. In this article, we will go over the basics of how the kiddie tax works.
The Basics
Kiddie tax applies to individuals who are under 18 and full-time students under 24. Only unearned income is subject to kiddie tax. Only funds over the $2,700 threshold are subject to the tax. This means funds over the threshold are subject to the parent’s marginal tax rate verses the child’s tax rate.
Individuals Subject
Children and young adults can be subject to the kiddie tax. This includes those 17 and younger at the end of the tax year. As well as 18-year-olds who provided less than or equal to half of their support. Finally, 19–23-year-olds who earn 50% or less of their support and are full time students. There are exclusions to these age groups. These include children with no living parents at the end of the tax year, if the individual is married and filed a joint tax return, or they are not required to file a tax return for the year.
Income
Kiddie tax is only associated with unearned income. Sources of unearned income would include:
- Taxable interest
- Dividends
- Capital gains
- Rent
- Royalties
- Taxable portion of social security or pension benefits
- IRA distributions
Earned income is not subject to the tax. Sources of earned income include:
- Wages
- Salaries
- Tips
- Other compensation for personal services
- Distributions from certain qualified disability trusts
Reporting
If the child files a separate 1040 tax return you will report the kiddie tax on Form 8615-Tax for Certain Children Who Have Unearned Income. However, if certain requirements are met you can report the income and taxes on the parent’s tax return. Then you would use Form 8814-Parent’s Election to Report Child’s Interest and Dividends. In this instance, the child would report no gross income for the year and would not need to file a return.
Paying Kiddie Tax
If you feel you are going to owe kiddie tax, meet with a qualified tax professional who can help you plan accordingly.
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