8 Facts About the Kiddie Tax - The Little CPA (2024)

FAQs

What is the purpose of the kiddie tax? ›

The kiddie tax prevents parents from avoiding taxes by transferring large gifts of stock. All unearned income over the threshold is taxed at the parent's marginal income tax rate rather than the lower child's tax rate.

The kiddie tax was enacted as part of the Tax Reform Act of 1986, P.L. 99-514, §1411. It was first effective for tax years beginning after Dec. 31, 1986.

Unearned income from interest, dividends, and capital gains are taxed in tiers defined by the IRS. For a child with no earned income, the amount of unearned income up to $1,300 is not taxed in 2024. The next $1,300 is taxed at the child's rate. Any amount above $2,600 is taxed at the parents' rate.

The Kiddie Tax is a part of income tax rules that apply to individuals under 18 years and full-time students under 24 years of age. If the child's unearned income, or investment income, is more than the Kiddie Tax threshold for the tax year, then the child must pay tax on any unearned income over the threshold.

The Kiddie Tax for 2020 and Later

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) repealed the changes made by the TCJA in the kiddie tax. The SECURE Act reinstated the kiddie tax as it was before 2018. This change is mandatory for 2020 and later.

The first $1,250 (2023) of unearned income is covered by the kiddie tax standard deduction, so it isn't taxed. The next $1,250 (2023) in unearned income is taxed at the child's tax rate, which is ordinarily lower than the parent's. Income over $2,500 (2023) is taxed at the parent's maximum income tax rate.

Introduced as part of the Tax Reform Act of 1986, the kiddie tax prevents parents from shifting wealth into their children's names to reduce their tax liability.

Accessed Feb 2, 2024. Under the kiddie tax, the first $1,250 of a child's 2023 unearned income is not taxed. The next $1,250 is taxed at the child's tax rate. Any unearned income over $2,500 is taxed at their parent or guardian's marginal income tax rate, using IRS Form 8615.

It has also being shown to be one of the most effective tools ever for lowering child poverty. Enacted in 1997, the credit currently provides up to $2,000 per child to about 40 million families every year. The American Rescue Plan made historic expansions to the Child Tax Credit (CTC).

The IRS defines eligible compensation as taxable income, including wages, salaries, and tips. While children generally must be at least 16 years old to obtain formal employment, there are situations in which a younger child may earn income, such as modeling, acting, or working for a family company.

Are royalties subject to kiddie tax? ›

Children under the age of 18 at the end of the tax year or full-time dependent college students under the age of 24 may be subject to the kiddie tax. The tax applies only to unearned income, which is typically generated through investments, and can include interest, dividends, capital gains, rent and royalties.

The kiddie tax is a tax using the parent's marginal tax rate on the child's unearned income in excess of $2,200.

The tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24) and works like this: The first $1,250 of unearned income is covered by the kiddie tax's standard deduction, so it isn't taxed. The next $1,250 is taxed at the child's marginal tax rate.

Income over this amount was taxed at the parent's tax rate. From 2018 through 2025, the first $2,100 remains tax-free. Additional income, though, is taxed at “Estate and Trust” tax rates. The parent's tax bracket no longer makes any difference.

Who's a “Kiddie”? For kiddie tax purposes, a child is anyone under age 19 or any full-time college student under age 24. Previously, the kiddie tax applied only to children under age 14. But Congress increased the age limit to make it harder for parents and grandparents to reduce taxes by shifting income.

Here's the answer: kiddie tax rules apply to unearned income that belongs to a child. It means that if your child has unearned income more than $2,200, some of it will be taxed at estate and trust tax rates (for tax years 2018 and 2019) or at the parent's highest marginal tax rate (beginning in 2020).

If the child's unearned income — investment income — is more than the kiddie tax threshold for the tax year, then the child's unearned income over the threshold is subject to the kiddie tax and gets taxed at the parents' marginal tax rate rather than the child's tax rate.

Parents are not required to include their child's interest income on their own tax returns. However, if a child's investment income exceeds a certain threshold, the child may need to file a separate tax return to report this income.

Although the custodian in these accounts invests and manages the account, only the minor can use or benefit from it — the account and assets within are irrevocable and considered property of the minor. This means that the minor is also responsible for paying taxes on any investment income earned.