Learn about the kiddie tax.
For a long time, a popular tax-saving strategy for high-income families was to funnel unearned income through their children to reduce their overall taxes. The IRS has never been thrilled with this practice and adopted the "kiddie" tax in the 1980s to limit its effectiveness by taxing certain amounts of children's unearned income at a very high rate.
The Tax Cuts and Jobs Act (TCJA), the massive tax reform law that took effect in 2018, made major changes in the kiddie tax that were in effect for 2018 and 2019. However, these proved so unpopular they were repealed in 2019.
Who Does the Kiddie Tax Apply To?
The kiddie tax only applies to:
- children under age 18 at the end of the tax year,
- children age 19 at the end of the tax year who don't provide more than half their own support with earned income, and
- children under age 24 at the end of the tax year who are full-time students and whose earned income does not exceed half of the annual expenses for their support.
To be considered a student, a child must attend school full-time during at least five months of the year. It doesn't matter whether the child is claimed as a dependent on the parent's return. However, the tax does not apply to a child under 24 who is married and files a joint tax return.
The kiddie tax applies only to unearned income a child receives from income-producing property (or investment property), such as cash, stocks, bonds, mutual funds, and real estate. Any salary or wages that a child earns through full or part-time employment (or self-employment) aren't subject to the kiddie tax rules—that income is taxed at the child's regular income tax rate.
If your child's interest and dividend income (including capital gain distributions) was more than $1,250 and less than $12,500 (2023), you can elect to include that income on your (parents') return rather than file a return for the child. In this event, all the income is taxed at your tax rates—you could end up paying more with this method.
Otherwise, a child with more than $2,500 in unearned income in 2023 must file their own tax return with IRS Form 8615, Tax for Certain Children Who Have Unearned Income.
Also, children who earn more than the standard deduction—$13,850 in 2023—from both earned and unearned income must file their own tax return.
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The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) repealed the changes made by the TCJA in the kiddie tax.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. Under these rules, the Kiddie tax works like this:
- the first $1,250 (2023) of unearned income is covered by the kiddie tax's standard deduction and isn't taxed
- the next $1,250 (2023) is taxed at the child's tax rate, and
- all amounts over $2,500 (2023) are taxed at the parents' tax rate—that rate can be as high as 37%, as shown in the chart below, compared to the 10% rate that most children would be paying.
Tax Rate | Married, filing jointly | Head of household |
10% | 0 to $22,000 | 0 to $15,700 |
12% | $22,001 to $89,450 | $15,701 to $59,850 |
22% | $89,451 to $190,750 | $59,851 to $95,350 |
24% | $190,751 to $364,200 | $95,351 to $182,100 |
32% | $364,201 to $462,500 | $182,100 to $231,250 |
35% | $462,501 to $693,750 | $231,251 to $578,100 |
37% | all over $693,750 | all over $578,100 |
In some cases, figuring out the kiddie tax can be complex. For example, if a parent has more than one child subject to the kiddie tax, the net unearned income of all the children has to be combined, and a single kiddie tax calculated.
The Kiddie Tax for 2018 and 2019
For 2018 and 2019, parents had the choice of calculating their kiddie tax using their personal income tax rates or using the method prescribed by the TCJA. This method used the tax rates for trusts and estates instead of parent's personal rates. However, these rates can be higher than the parents' rates.
For example, the kiddie tax rate is 37% on income over $12,750. A married couple would have to have over $612,350 in income in 2019 to pay tax at this rate. On the other hand, children with smaller unearned incomes can pay less under these tax rates.
If you paid kiddie taxes for 2019 using the estates and trusts tax rates, you can recalculate them using your personal rates under the current rules. If this results in lower taxes, you were owed a refund. You may still have time to claim it by filing an amended return using IRS Form. You must amend your tax return within three years after the time you filed it, plus extensions. If you filed on April 15, 2020, or earlier, the time to amend has expired. But, if you obtained an extension to file, you may have until October 15, 2023, to amend your return and claim your refund.
Unfortunately, if you also paid kiddie taxes for 2018 using the estates and trusts tax rates, you can do nothing because the period to amend your 2018 tax return has expired.
FAQs
Otherwise, a child with more than $2,500 in unearned income in 2023 must file their own tax return with IRS Form 8615, Tax for Certain Children Who Have Unearned Income. Also, children who earn more than the standard deduction—$13,850 in 2023—from both earned and unearned income must file their own tax return.
What is the unearned income threshold for kiddie tax? ›
When does the kiddie tax apply for the 2023 tax year? The kiddie tax applies once the dependent's unearned income surpasses the $2,500. Their own marginal tax rate will apply for unearned income between $1,250 and $2,500.
What is the kiddie tax loophole? ›
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.
What is the kiddie tax limit for 2024? ›
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. For tax year 2024 (taxes filed in 2025), the kiddie tax threshold will rise to $2,600.
How do you explain kiddie tax? ›
The kiddie tax is a tax imposed on income unrelated to employment earned by individuals 18 years of age or under—or dependent full-time students under age 24. Introduced as part of the Tax Reform Act of 1986, it is designed to stop parents from registering investments in their children's name to avoid paying taxes.
What is the threshold for unearned income dependents? ›
The minimum income requiring a dependent to file a federal tax return. 2023 filing requirements for dependents under 65: Earned income of at least $13,850, or unearned income (like from investments or trusts) of at least $1,250.
What is the unearned income limit for dependents? ›
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.
At what age does Kiddie Tax end? ›
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.
Which of the following is not included in unearned income for Kiddie Tax purposes? ›
The correct answer is salary income.
Can grandparents pay Kiddie Tax? ›
Under the Kiddie Tax rules, a minor child's investment income above $1,100, some or all of which may come from assets in a custodial account, may be taxed at the parent's higher rates. This is true even if all the money to fund the custodial account came from a grandparent or someone else other than a parent.
They should not be deterred by the Kiddie Tax, as there are legal ways to avoid it. This is generally accomplished by making investments that produce tax-free income or that defer income until the year the child reaches age 18 (age 24 if a full-time student).
What is considered unearned income? ›
Unearned Income. Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust.
Does Kiddie Tax still exist? ›
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.
How is unearned income taxed? ›
Unearned income works differently than earned income. You don't have to pay any payroll taxes, including Social Security and Medicare, on the various forms of unearned income. However, your unearned income (line 37 of your Form 1040) will count toward your adjusted gross income on your state and federal tax returns.
How is the kiddie tax calculated by computing? ›
The Kiddie Tax is calculated based on the child's age, earned income, unearned income, dependency status, and any deductions. But as always, IRS tax rules are a bit more complicated than that.
Do parents have to report children's income? ›
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.
Does unearned income qualify for child tax credit? ›
For tax year 2022 forward, no earned income is required and you may have a net loss of as much as $33,497. However, you must otherwise meet the CalEITC and YCTC requirements. Note that taxpayers without at least $1 of earned income would not qualify for CalEITC.
Do I need to file a tax return for my minor child? ›
According to IRS Publication 929, "If a child can't file their own return for any reason, such as age, the child's parent, guardian, or another legally responsible person must file it for the child."13. Your child can receive tax deficiency notices and even be audited.
