The "kiddie tax" are a set of tax rules that apply to unearned income of children under the age of 19 at the end of the tax year, or under the age of 24 if they are full-time students. Historically, to minimize a parent's own tax liability, the parent might transfer income-producing assets to their children (up to 23 years of age) for a lower tax bracket. The kiddie tax aims to prevent this strategy by taxing unearned income of children at their parents' marginal tax rate, rather than at the potentially lower rates that would apply to the child.
In 2018, the Tax Cuts and Jobs Act (TCJA) made significant changes to the kiddie tax rules and how its calculated. The kiddie tax is generally calculated using the trust and estate tax rates, which can lead to higher taxes for affected children in some cases. Additionally, the kiddie tax is only assessed on a child’s (or young adult’s) unearned income meaning the income's interest, dividends and capital gains.
How Does it Work?
To begin, add the net unearned income and earned income of the child. Then, subtract the standard deduction to get the "kiddie" taxable income. The net earned income is taxed at the normal income tax rate for single taxpayers. However, the unearned income that exceeds the standard deduction for 2024 ($2,600) or 2023 ($2,500) is subject to the rules of the kiddie tax and will be taxed at the parent's higher federal income tax rate.
Here are a few examples of how the kiddie tax works.
Example #1
A 16-year-old girl, Lily, has $2,600 in interest income from a savings account and $1,100 in dividend income from stocks in 2023. Her parents' marginal tax rate is 24%.
Lily's unearned income totals $3,700 ($2,600 + $1,100).
Lily is under 18 and has unearned income exceeding the threshold of $2,500 (for 2023), so the kiddie tax applies.
Instead of being taxed at Lily's own tax rate, her unearned income will be taxed at her parents' marginal tax rate of 24%.
So, in this case, Lily's unearned income of $3,700 would be subject to a tax rate of 24%.
Example #2
A full-time college student, AJ, earned $1,500 in interest income and $3,200 in dividend income in 2023. His parents' marginal tax rate is 35%.
AJ's unearned income totals $4,700 ($1,500 + $3,200).
Although AJ is a full-time college student, he is still subject to the kiddie tax because he is under 24 and has unearned income exceeding the threshold of $2,500.
AJ's unearned income will be taxed at his parents' marginal tax rate of 35%.
So, in this case, AJ's unearned income of $4,700 would be subject to a tax rate of 35%.
Example #3
A 17-year-old boy, Randy, earned $3,200 from a part-time job in 2023 with no unearned income. Since Randy's income is earned income rather than unearned income, the kiddie tax doesn't apply to him. So, Randy will file his own tax return and will be subject to the regular income tax rates for individuals.
To file, children and parents should use the Form 1040 and file the form with the child's tax returns.
Here's a Recap
If your child falls within the following limitation, then the kiddie tax will apply and a Form 1040 will be required with your child's tax returns.
Has more than $2,500 of unearned income for 2023
Is under the age of 18 at the end of 2023 or is a college student between the age of 19 and 23 with an unearned income exceeding $2,500
Other requirements to the kiddie tax requires the child to have at least one living parent and for them not to have filed a joint return for the filing year.
We hope to have provided you with the basics to understand the kiddie tax and its rules. If your child is subject to this tax or you’re uncertain and would like an evaluation, please schedule a free 30-min consultation appointment to discuss. Our Tax Consultant are eager to help!