Aug
The kiddie tax is a tax first instituted in 1986. The purpose of the kiddie tax was to prevent wealthy taxpayers, who were in high tax brackets from shifting investment earnings to their children who were typically in lower income tax brackets.
The original law applied only to children under age 14. Over the years the IRS has continued to expand the age limit and it now applies to children that are dependents of their parents. To clarify, this means any child under age 18 is subject to the kiddie tax. Children who are 18 are subject to the kiddie tax only if their own earned income is less than 50% of their support. Children ages 19 – 23 that are full time students and also provide less than 50% of their own support are also subject to the kiddie tax. The good news, if you can call it that, is that once a child reaches age 24, the kiddie tax no longer applies.
What are the consequences of being subject to the kiddie tax?
The law currently states that the first $1,000 of a child’s investment income can be reduced by a standard deduction, the next $1,000 is taxed at the child’s income tax rate and anything after that is taxed at the parents’ income tax rate.
What qualifies as investment income?
Investment income for kiddie tax purposes is defined as any income that is not earned income (compensation for services) and includes interest income, dividend income, capital gains, royalties, rents and retirement income. Although it seems a little strange to discuss retirement income and the kiddie tax in the same sentence, this situation can occur when the child has inherited an IRA from a deceased relative and is required to take annual distributions.
How do I report the kiddie tax to the IRS?
There are two methods of reporting the kiddie tax to the IRS. The first involves the child filing his/her own income tax return. The child files Form 8615 with their income taxes. This form will include the parents’ information so that the correct income tax rate can be applied.
The second method is that the parents report the child’s income on their income tax return. In order to be able to do this the child’s income must be in the form of interest income, dividend income or capital gain distributions. If the child has any other investment income then he/she must file their own tax return.
Conclusion
This article attempts to explain very quickly the kiddie tax, as always, I advise you to meet with a tax professional to help with these rules if you have any questions.