Teens & Taxes: Does My Teen Have to Pay Kiddie Tax on Investment Income? (2024)
Dawn Allcot
·1 min read
If your teen earns investment income, such as interest and dividends from stocks or bank accounts, and that amount totals more than $2,200, they are subject to the same income tax as adults. Deemed the “kiddie tax,” this law was introduced to prevent parents and guardians from transferring dividend-earning stocks and investments over to their children when seeking to avoid taxes or pay a lower tax rate.
However, if your teen’s interest, dividends and capital gains distributions is less than $11,000 in 2021, you can claim the unearned income on your tax return instead of having your child or teen fill out their own return. This law — and related income thresholds — apply to teens aged 18 or younger, or young adults between the ages of 19 and 24 living at home and attending college full-time.
It might make sense to claim your teen’s investment income on your tax returns if they don’t have other income and wouldn’t need to file a federal or state tax return if not for their investment income. You can save the time and potential cost of tax prep.
Any income over $2,200 is taxed at the same rate whether you claim the money or they do. And while you may have tax credits, deductions, and withholding taxes to offset the amount of non-investment income tax (NIIT) owed, your child probably does not. If they filed separately, they might have a tax bill to pay by April 18, 2022.
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.
For tax year 2023, the threshold amount was increased to $2,500. This means that if a child has investment income greater than or equal to $2,500, they will be required to file their own tax return. However, parents have the option to include the child's investment income on their own tax return by filing Form 8814.
If you have a dependent who's earning income, good news — you can still claim them as a dependent so long as other dependent rules still apply. Your dependent's earned income doesn't go on your return. Filing tax returns for children is easy in that respect.
What Percentage Is Kiddie Tax? In 2023, unearned income under $1,250 qualifies for the standard deduction. The next $1,250 is then taxed at the child's marginal tax rate, and then all amounts over $2,500 are taxed at the parent's tax rate, which can vary from 10% to 37%.
When a Minor Has Capital Gains. Capital gains occur when you buy an investment for one price, and then sell it at a higher price. If a teen has investments that produce capital gains, such as stocks or mutual funds, they may be subject to what's called the kiddie tax.
If your child's interest, dividends, and other unearned income total more than $2,500, it may be subject to a specific tax on the unearned income of certain children. See the Instructions for Form 8615, Tax for Certain Children Who Have Unearned Income for more information.
Earned income includes wages, tips, salaries, and payment from self-employment. This threshold increases to $14,600 for 2024. A dependent child who receives more than $1,250 in investment income in 2023 ($1,300 in 2024) is required to file a tax return.
A minor who may be claimed as a dependent needs to file a return if their income exceeds their standard deduction. A minor who earns less than $13,850 in 2023 will usually not owe taxes but may choose to file a return to receive a refund of tax withheld from their earnings.
A child who has only earned income must file a return only if the total is more than the standard deduction for the year. Your child will have to pay tax on the salary only to the extent it exceeds the standard deduction amount for the year: $13,850 in 2023 ($14,600 for 2024).
If the dependent child is being claimed under the qualifying relative rules, the child's gross income must be less than $4,700 for the year in 2023. This threshold increases to $5,050 for 2024.
What is kiddie tax? The kiddie tax was established as part of the Tax Reform Act of 1986 to prevent parents from taking advantage of a tax loophole by shifting wealth into their children's name to avoid paying taxes at a higher rate. Before then, children's investments were taxed at the child's presumably lower rate.
The first $1,250 of a child's unearned income is tax-free, and the next $1,250 is subject to the child's tax rate. Any additional earnings above $2,500 are taxed at the greater of the child's or the parents' tax rate.
Who Does the Kiddie Tax Apply To? The Kiddie Tax applies to dependent children who are younger than 19 years old, or who are full-time students who are between the ages of 19 and 23. An exception to the Kiddie Tax is a child with earned income totaling more than half the cost of their support.
If the form has your child's Social Security number and the amount of the investment income is less than $1,050, you don't have to report the income. However, if the Form 1099-DIV has your Social Security number on it, you're required to report this nominee income on your return.
To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one. They can start earlier than this, but they'll need a parent or guardian to open a custodial account for them. What is a custodial account?
Unlike 529 plans and ESAs, custodial accounts are subject to the so-called "kiddie tax." This tax rule applies to unearned income (i.e., investment income) up to a certain threshold. Over that threshold, the child will pay taxes at the parent's tax rate.
If the form has your child's Social Security number and the amount of the investment income is less than $1,050, you don't have to report the income. However, if the Form 1099-DIV has your Social Security number on it, you're required to report this nominee income on your return.
Per the IRS, "If a child's parents are married to each other and file a joint return, use the joint return when electing to report the child's interest and dividend income on their return. For other situations when the parents do not file a joint return, see Parents Who Don't File a Joint Return next."
Use Form 8615 to figure the tax on your child's investment income. How much can a child earn before paying taxes — your child's investment income might be more than $2,500 and less than $12,500. If so, you can choose to include the income on your return. You'll use Form 8814, and your child won't need to file a return.
The IRS has the authority to impose fines and penalties for your negligence, and they often do. If they can demonstrate that the act was intentional, fraudulent, or designed to evade payment of rightful taxes, they can seek criminal prosecution.
Introduction: My name is Mrs. Angelic Larkin, I am a cute, charming, funny, determined, inexpensive, joyous, cheerful person who loves writing and wants to share my knowledge and understanding with you.
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