There are a set of rules that apply to the taxation of children and investment income. This set of rules is known as the Kiddie Tax. The Kiddie Tax applies to children with investment (unearned) income who are under age 19 or under age 24 and a full-time student. For purposes of this discussion, we will ignore other types of income, such as wages, which are taxed under the same rules that apply to everyone.
The Kiddie Tax is essentially a 3-tiered structure.
- The first $1,000 of investment income is tax free.
- The next $1,000 is taxed at the child’s rate.
- Any investment income over $2,000 is taxed at the parent’s rate. This computation is made on Form 8815.
If the child’s investment income is less than $10,000, the parents can elect to report the child’s income on their personal income tax return. This is done by completing Form 8814. The tax calculations should be run both ways to assure that the lowest possible tax is paid. One note of caution; including the child’s income on the parent’s return may result in a loss of deductions and/or credits due to various phase outs as income increases.
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- Doherty & Associates Team