Taxes

Kiddie Tax: What Are The Rules & What Tax Forms You Need

Manasa Reddigari

Updated 6/13/2018

Of the gifts you may give to your children this year, think carefully about whether offloading your investment income is one of them. This is because the IRS imposes the “Kiddie Tax” on children’s investment income. Despite its playful moniker, the Kiddie Tax can place a significant burden on parents caught unaware by its limitations. Read on to learn about the Kiddie Tax Rules and the potential financial implications to you.

Recently, Congress revised the Kiddie Tax rate structure under the Tax Cuts and Jobs Act (TCJA). The rest of the Kiddie Tax rules are the same as before.

Unfortunately, with all the new tax changes – depending on your personal circumstances – your children or grandchildren may be hit even harder by the kiddie tax. If your child or grandchild has significant unearned income, planning for 2018 is especially crucial.

Kiddie Tax Rules?

For parents with sizeable investment income, it is tempting to offload a portion onto your child. That way, you can capitalize on the child’s lower tax bracket and, in effect, lower the total tax liability for the family. The IRS imposed the Kiddie Tax Rule to discourage parents from doing this.

For 2018 through 2025, the TCJA revises the kiddie tax rules to tax a portion of a child’s net unearned income at the rates paid by trusts and estates. These rates can be as high as 37 percent for ordinary income or, for long-term capital gains and qualified dividends, as high as 20 percent.

In calculating the federal income tax bill for a child who’s subject to the kiddie tax, the child is allowed to deduct his or her standard deduction.

For 2018, the Kiddie Tax potentially affects children who don’t provide over half of their own support in 2018 and who live with their parents for more than half of the year.

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Kiddie Tax Rules Prior to 2018

Prior to the TCJA, the Kiddie Tax referred to the tax imposed on children’s unearned income beyond certain limits. Generally, this applied when the unearned income of a child was more than $2,100.

Past that $2,100 threshold, the Kiddie Tax kicks in. This means the excess can be taxed at the parents’ marginal tax rate. The amount under the income limit would be taxed at the child’s (typically lower) rate.

Who does the Kiddie Tax Hit?

The income Kiddie Tax brackets are revised for 2018 through 2025 but the basic rules are still the same. Depending on how you choose to report your child’s income, the Kiddie Tax applies if the child:

  • Is under age 18 at the end of the tax year
  • Was age 18 at the end of the tax year and did not have earned income exceeding half of the child’s support
  • Was a full-time student aged at least 19 but under 24, and did not have earned income exceeding half of the child’s support.

In addition to earned income being exempt from the Kiddie Tax, there are other reasons that a child’s income would not be subject to the Kiddie Tax, including:

  • Children who were not required to file a return because they did not have enough income to report.
  • Children who earned more than half of their required support. In this scenario, the child is not likely to be someone else’s dependent.
  • Anyone who files a married filing jointly tax return.

What Kiddie Tax Forms do You Need for The IRS?

If you are required to pay the Kiddie Tax, calculate the tax owed using Form 8615 and attach it to the child’s tax return if the child’s interest, dividends and other unearned income add up to more than $2,100 for 2015 and other required criteria cited in the form are met.

Alternatively, parents may elect to include their child’s income on their own tax return using Form 8814 instead of filing a tax return for the child if the child’s interest and dividend income (including capital gain distributions) add up to less than $10,000, and other required criteria cited in the form are met. For more information on reporting investment income subject to the Kiddie Tax, see Topic 505.

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