The federal kiddie tax may have a cute name, but it’s something you should take seriously.
That’s because Congress introduced it in 1986 for a serious reason: to close a loophole that allowed parents to put investment assets in their children’s names to pay a lower tax rate on the income generated.
So if stocks, bonds, CDs, or other investment gifts are purchased in your child’s name, be aware of how it affects their tax status (yes, even if a newborn!) and how you should handle their earnings.
We answer those questions here so you don’t learn it the hard way, when a distressing notice from the IRS shows up in your mailbox, asking why dividends on the Disney shares you bought for little Luna weren’t reported.
Contents |
| What is the kiddie tax and when does it apply? |
| What ages qualify for the kiddie tax? |
| Where is a child’s unearned income reported? |
| Are there any exceptions to the kiddie tax? |
The kiddie tax is a tax that’s paid on a dependent child’s unearned income, such as interest, dividends, capital gains distributions, taxable scholarships, and income produced by custodial accounts under the Uniform Gifts to Minors Act (UGMA). The kiddie tax does not, however, apply to wages or salary earned.
The kiddie tax comes into play if unearned income exceeds the annual threshold for the tax year. Here’s how it works:
The kiddies tax applies to all children 18 years of age or under at the end of the tax year, or dependent full-time students between 18 and 24.
Generally, full-time usually means the student is enrolled in 12 credit hours or more at a post-secondary institution, though each school differs on how they define full-time.
If unearned income exceeds the standard kiddie tax deduction, a separate return should be filed by the child, or in the child’s name. It is usually not reported on the parent’s tax return, even if income in excess of the threshold is taxed at the parent’s rate.
Parents can, however, attach a minor’s unearned income to their return if it’s under $13,000 and they file IRS Form 8814, though it is generally recommended to file a separate return for the child.
More on this topic can be found in our article covering child tax returns.
Yes, a child with earned income (wages, salaries and tips) is not subject to the kiddie tax, or any tax up to the $14,600 standard deduction. They may wish to file a return anyway to receive a refund on taxes withheld. Above $14,600 the income is taxed at the child’s tax rate, not the parent’s.
Other exceptions are a child who earns income totaling more than half the cost of their support, and children who file tax returns as a married couple filing jointly.
If your child, no matter how young, receives interest from monetary gifts, dividends from investments, or other forms of unearned income, they, or you on their behalf, must file a return if the income exceeds an annual deductible threshold, and taxes must be paid at the lower kiddie tax rate.
If the amount of taxable income exceeds the kiddie tax limit, that excess is taxed at the parent’s tax rate. Failure to file may result in penalties.
If you have any questions about this article, or any other tax or accounting needs to discuss, we’re always happy to help. Just click the button below to set up a free consultation: