What is the Kiddie Tax?
The Kiddie Tax is a tax applied to a child’s unearned income. When children under the age of 18 make $2,100 or more in unearned income, that income is taxed at the guardian’s tax rate. Unearned income is considered any gifts of stock or other investments. The Kiddie Tax does not apply to earned income (income made through employment.)
The Internal Revenue Service (IRS) uses the Kiddie Tax to discourage parents to put investments in their children’s names to try and reduce their taxes. The original law only applied to children under 14; however, the law was changed to include a wider age group. The law now applies to:
- Any children under 18
- Children who are 24 or under and are full-time students.
If your child owes Kiddie Tax it should be reported on their tax return. You can report Kiddie Tax on the parent’s tax return but it can affect deductions and credits, so it’s best to file a return for the child.
When you are filing a return for a child you will need the parent’s information. Here’s how to determine which parent’s information to use:
- If parents are married filing jointly use the primary taxpayer’s information. (They will appear first on the tax return.)
- If the parents have never been married use the parent with the highest taxable income.
- If the parents are divorced use the custodial parent’s information.
Kiddie Tax Scenario
Dennis and Janet Feinstein gifted their daughter DeeDee a stock that pays out approximately $3,000 a year. Joanna was gifted this stock when she was 12 years old; she is now 17.
The first two years she had this stock her profits were under the Kiddie Tax requirements so she did not have to pay any tax on it. However, for the last three years she has made $3,000 a year. Because it exceeds the $2,100 for the Kiddie Tax DeeDee has to pay taxes on her stocks.
Dennis and Janet make $85,000 a year, which puts them in the 25% tax bracket. DeedDee’s stock are taxed at her parent’s tax rate, so she will pay $750 in taxes on her stocks.
Dennis will prepare DeeDee’s tax return using his information, because he is the primary taxpayer in their family. DeeDee will have a separate tax return filed in her name to pay the taxes on her unearned stock income.
DeeDee’s stock can be taxed under the Kiddie Tax until she is either no longer a full-time student or until she’s 24, whichever comes first.