Gavin Howe
The Kiddie Tax is a law that was established in 1986 to prevent parents from taking advantage of lower tax rates by transferring assets and income-producing investments to their children's names. The Kiddie Tax law imposes taxes on unearned income types such as dividends, interest, and capital gains for individuals under a certain age and income threshold. For the 1999 tax year, the Kiddie Tax would apply to children under the age of 14 with unearned income exceeding a certain threshold, which is adjusted annually for inflation. This law ensures that income generated by minors or full-time students under 24 is taxed at their parents' marginal tax rates, which can be significantly higher.
| Characteristics | Values |
|---|---|
| Year of introduction | 1986 |
| Purpose | To prevent parents from transferring assets to their children to take advantage of their lower tax rates |
| Type of income taxed | Unearned income, including dividends, interest, and capital gains |
| Age limit | Under 18 years old or dependent full-time students under 24 years old |
| Income limit | $2,600 |
| Form to be attached | Form 8615 |
| Exceptions | Children with earned income totaling more than half the cost of their support, children who file tax returns as married filing jointly |
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What You'll Learn
- Kiddie Tax Law applies to children under 18 and full-time students under 24
- It taxes unearned income above a threshold at the parent's marginal tax rate
- Interest, dividends and capital gains are taxed in tiers defined by the IRS
- A separate tax return must be filed for children in certain cases
- The Tax Cuts and Jobs Act of 2017 changed the rules, making it more expensive
Kiddie Tax Law applies to children under 18 and full-time students under 24
The Kiddie Tax Law was introduced in 1986 to prevent parents from taking advantage of a tax loophole by shifting income-producing assets into their children's names to benefit from their lower tax rates. The law applies to children under 18 and full-time students under 24.
The Kiddie Tax Law stipulates how investment and unearned income are treated for minors or full-time students under 24. It targets individuals with investment and unearned income exceeding a set yearly threshold. This includes dividends, interest, and capital gains, but not employment income.
For children under 18, the Kiddie Tax Law applies regardless of their support status. For those aged 18, the tax applies if their earned income is less than or equal to half of their support. For individuals aged 19 to 23, the tax applies if they are full-time students and their earned income is less than or equal to half of their support.
The tax is calculated based on the child's unearned income. In 2023, unearned income under $1,250 qualified for the standard deduction. The next $1,250 was taxed at the child's marginal tax rate, which could be as low as 0%. Any amount over $2,500 was then taxed at the parent's marginal income tax rate, which could be as high as 37%.
It is important to note that the Kiddie Tax Law has undergone changes over the years, and the specific thresholds and tax rates may vary from year to year.
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It taxes unearned income above a threshold at the parent's marginal tax rate
The Kiddie Tax is a law that stipulates how investment and
The Kiddie Tax targets individuals below a certain age with investment and unearned income exceeding a set yearly threshold. This threshold is adjusted for inflation each year. For 2024, the first $1,300 of a child's unearned income is tax-free, and the next $1,300 is taxed at the child's rate. Any additional earnings above $2,600 are taxed at the parents' marginal tax rate. For 2025, the figures are $1,350, $1,350, and $2,700, respectively.
The Kiddie Tax does not apply to children who have earned income from a job, such as salary or wages, and this income is taxed at the child's rate. It also does not apply to children who are married and filing joint tax returns, or those with no living parents at the end of the tax year.
Families with children who have unearned income that is subject to the Kiddie Tax must file IRS Form 8615 with their federal tax return. A separate tax return must be filed for children in certain cases. Interest earned on 529 plans and custodial 529 plan accounts is not subject to the Kiddie Tax.
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Interest, dividends and capital gains are taxed in tiers defined by the IRS
The Kiddie Tax Law was created under the Tax Reform Act of 1986 to prevent parents from registering income-producing investments in their children's names to pay lower taxes. The law stipulates how investment and unearned income are treated for minors or full-time students under 24.
Interest, dividends, and capital gains are taxed in tiers defined by the IRS. Ordinary dividends are considered ordinary income and are taxed at the current rates for different tax brackets—between 10% and 37% as of 2024. Qualified dividends, which meet IRS requirements to be taxed at lower capital gains rates of 0%, 15%, or 20%, are typically paid by stocks of US companies. For example, in 2023, unearned income under $1,250 qualified for the standard deduction. The next $1,250 was taxed at the child's marginal tax rate, and then all amounts over $2,500 were taxed at the parent's tax rate, which could vary from 10% to 37%.
Dividends can be classified as either ordinary or qualified. Ordinary dividends are taxable as ordinary income, while qualified dividends that meet certain requirements are taxed at lower capital gain rates. The payer of the dividend must correctly identify each type and amount of dividend when reporting them on Form 1099-DIV for tax purposes.
Capital gains are taxed at different rates depending on overall taxable income. For taxable years beginning in 2024, the tax rate on most net capital gains is no higher than 15% for most individuals. A capital gains rate of 0% applies if your taxable income is less than or equal to certain thresholds, while a rate of 20% applies if your income exceeds these thresholds. There are also exceptions where capital gains may be taxed at rates greater than 20%.
Interest income from bonds is generally taxed at ordinary income tax rates. However, municipal bonds are generally exempt from federal income tax and may also be exempt from state and local taxes if the investor lives in the issuing state. US Treasury bonds are generally subject to federal income tax but are exempt from state and local taxes.
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A separate tax return must be filed for children in certain cases
The kiddie tax is a law that stipulates how investment and unearned income are treated for minors or full-time students under 24. It was introduced to prevent parents from using their children's lower tax rates.
However, if a child has unearned income from sources such as investments or savings, and this income exceeds a certain threshold, it may be subject to the kiddie tax and taxed at the parent's marginal tax rate. In this case, a separate tax return must be filed for the child, and Form 8615 should be attached to the child's tax return. The kiddie tax threshold varies annually and is adjusted for inflation. For 2025, the threshold is $2,700, so if a child's unearned income exceeds this amount, a separate tax return must be filed, and the excess income will be taxed at the parent's rate.
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The Tax Cuts and Jobs Act of 2017 changed the rules, making it more expensive
The Kiddie Tax Law, introduced in 1986, is a law that stipulates how investment and unearned income are treated for minors or full-time college students under 24. It was created to prevent parents from shifting income-producing assets to their children to take advantage of their lower tax rates. Before the introduction of the Kiddie Tax Law, income earned on assets held under a child's name was taxed at the child's lower income tax rate. The Kiddie Tax closed this loophole by taxing children's passive income at higher rates.
The Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to the Kiddie Tax Law, which made it more expensive for some families. Under the TCJA, the tax rates that apply to trusts and estates were substituted for the parent's tax rate. This change caused an uproar, particularly due to its impact on Gold Star families and scholarships. As a result, Congress included a provision in the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) to revert the Kiddie Tax to the previous rules retroactively.
The TCJA also made other changes to personal taxes. It reduced statutory tax rates at almost all levels of taxable income and shifted the thresholds for several income tax brackets. The law increased the standard deduction, the child tax credit (CTC), and created a new $500 tax credit for dependents not eligible for the CTC. Additionally, the TCJA repealed personal and dependent exemptions and retained preferential tax rates on long-term capital gains and qualified dividends.
The impact of the TCJA on the Kiddie Tax Law was temporary, lasting from 2018 to 2020. For the 2018 and 2019 tax years, taxpayers could choose between using the estate tax rates or the parent's tax rate for calculating the Kiddie Tax. However, starting in 2020, the parent's tax rate was applied consistently.
In summary, the Tax Cuts and Jobs Act of 2017 did make changes to the Kiddie Tax Law, which initially increased the tax burden on some families. However, due to the negative backlash, these changes were ultimately reverted, and the Kiddie Tax returned to the previous rules.
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Frequently asked questions
The Kiddie Tax Law is a law that stipulates how investment and unearned income are treated for minors or full-time students under 24. It was created to prevent parents from shifting income-producing assets to their children to take advantage of their lower tax rates.
The Kiddie Tax Law applies to dependent children under the age of 18 at the end of the tax year and full-time students under the age of 24.
The Kiddie Tax Law applies to unearned income, such as interest, dividends, and capital gains. It does not apply to earned income, such as wages, salary, or self-employment income.
For the 1999 tax year, the first $700 of a child's unearned income was tax-free, and the next $750 was taxed at the child's tax rate. Any income above $2,900 was taxed at the parent's marginal tax rate.
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