Wiki - Kiddie tax update

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Wiki - Kiddie tax update

Post by LadyGeek »

Via email, sscritic expressed concerns on the accuracy of the wiki's Kiddie tax article.*

Long story short, I worked with sscritic to create this draft page: User:LadyGeek/Kiddie tax

I don't have experience in this area and would like the experts to review this update. Once we have a consensus, we can update the "live" article.

Comments / questions / corrections are welcome. Wiki editors can update the page directly.

* Our email address is listed in the first section of the Forum Policies. Also, the Contact link on the site's home page.
==================================

For those interested in editing the wiki:

The draft page was created and edited using the wiki's Visual Editor. If anyone was holding back becoming an editor because they thought editing was too hard, please reconsider. Inserting the table was literally a copy-n-paste from the IRS website.

You can request to become an editor by posting in Join the Wiki!.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
sycamore
Posts: 2789
Joined: Tue May 08, 2018 12:06 pm

Re: Wiki - Kiddie tax update

Post by sycamore »

In the article section on Form 8615 - tax for certain children who have unearned income, it starts off:
The Form 8615 instructions state that Form 8615 must be filed for any child who meets all of the following conditions.

The child had more than $2,200 of unearned income.

The child is required to file a tax return. (see the 1040 instructions above)

The child meets the qualifying child requirements.

Under current law, the incomes of all the children have to be pooled, as they were before 2018. Line 7 of Form 8615[10] (2020) says:
...
1. Regarding the "all of the following conditions", does that specifically mean the three subsequent sentences that start with "The child ..." ?

2. I assume per convention we should enter those conditions as bulleted list items?

3. Regarding "The child meets the qualifying child requirements" - I may have it missed it, but where are those requirements? I don't know if those requirements need to be spelled out or merely referenced.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

Thanks! The wiki has been revised: User:LadyGeek/Kiddie tax

Via email from sscritic, the requirements have been spelled out. Also, there is an additional explanation on how to determine the child's age per the Form 8615 instructions.

Also fixed - A typo in the Form 8615 instructions in Note 1 (footnote).

Comments / questions / concerns are welcome.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

I have added the "The kiddie tax in general" section from the live page. Is the draft page "good enough" to replace the current "live" page?

What we have now: Kiddie tax

The draft page: User:LadyGeek/Kiddie tax
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
gobel
Posts: 344
Joined: Mon Feb 08, 2021 4:50 pm

Re: Wiki - Kiddie tax update

Post by gobel »

The use of "dependent child" all over is misleading. Yes, most of the time a dependent child with unearned income over 2200 has to pay kiddie tax, but that's not the criteria. See https://www.irs.gov/taxtopics/tc553
and the child didn't have earned income that was more than half of your support.
You can be independent and still owe kiddie tax, or be dependent and not owe it. Maybe just use the word "child" by itself then.

Half the wiki article seems to focus on a blind child. Why is that the example? A more generic one would be easier to understand.

The section at the end "Tax loss carryover" seems completely pasted on and superfluous, and also another edge case example.

The new "in general" part at the top mentions "rate for trusts" which I assumed was why the whole page was being updated in the first place. It's obsolete (it was part of TCJA that was repealed the next year, and even made optional retroactively) and kiddie tax is based on the parent's marginal tax brackets again.

The bullet about gifting securities to the child to save taxes is true, but the numbers are off. If you gift $2200 of LTCG (ie you gift shares containing unrealized gains of $2200 and then sell them in the child's account), then you can save 15% to 23.8% times $2200, ie $330 to $523.60. If you gift $2200 of STCG and are in the 37% bracket with 3.8% NIIT, you can save $787.60.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

gobel wrote: Thu Sep 16, 2021 6:27 pm The section at the end "Tax loss carryover" seems completely pasted on and superfluous, and also another edge case example.

The new "in general" part at the top mentions "rate for trusts" which I assumed was why the whole page was being updated in the first place. It's obsolete (it was part of TCJA that was repealed the next year, and even made optional retroactively) and kiddie tax is based on the parent's marginal tax brackets again.
Thanks! I removed the superfluous section and the phrase with "rate for trusts". See: User:LadyGeek/Kiddie tax

I'll ask sscritic (via email) to address your comments. Sorry, I don't have the expertise to do this myself.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
RubyTuesday
Posts: 1054
Joined: Fri Oct 19, 2012 11:24 am

Re: Wiki - Kiddie tax update

Post by RubyTuesday »

Glad to hear my favorite ex-BH poster is alive and kicking.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

Yes, he's around and would like a few days to respond to the comments.

If anyone has additional suggestions on this wiki article, please post here. Wiki editors are welcome to edit the page directly.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
hornet96
Posts: 747
Joined: Sun Nov 25, 2012 6:45 pm

Re: Wiki - Kiddie tax update

Post by hornet96 »

I think it would be prudent to state prominently at the top of the page that it is not intended to constitute formal tax advice and should not be relied upon in preparing any tax returns. That comment would actually apply to any page on the wiki describing provisions of tax law, simply as a precaution in the event that information becomes outdated or is discovered to not be completely accurate.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

That's already in the wiki's footer. When viewing on a desktop monitor, it's at the bottom of the page. For a mobile device, it's at the bottom of the menu.

In both cases, the link looks like this: No guarantees are made as to the accuracy of the information on this site or the appropriateness of any advice to your particular situation. Click for complete Disclaimer.

It's similar to the disclaimer at the bottom of every forum page:
No guarantees are made as to the accuracy of the information on this site or the appropriateness of any advice to your particular situation.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
hornet96
Posts: 747
Joined: Sun Nov 25, 2012 6:45 pm

Re: Wiki - Kiddie tax update

Post by hornet96 »

^^^^^^ Thanks LG, I see it now. It wasn’t immediately obvious when viewing on my iPad. I would still suggest making the disclaimer a little more prominent for any tax related pages, but it’s there, so the site should theoretically be covered in any event.
HereToLearn
Posts: 849
Joined: Sat Mar 17, 2018 5:53 pm

Re: Wiki - Kiddie tax update

Post by HereToLearn »

I do not know if you want to wade into this area, or just limit the discussion to "tax and reporting of the investment income of certain children", but my experience with Kiddie Tax arose from my college student's summer research stipend.

Several helpful posters on this board helped me understand and then wade through the Turbo Tax filing.

Thanks for all of your helpful posts.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

Unfortunately, sscritic has declined to participate further in this discussion. Nothing is wrong, it's just too difficult to work at this level of detail by email.

gobel - If you can provide the details of what you'd like to see, I'll incorporate them in the wiki.

HereToLearn - What would you like to put in the article?
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
HereToLearn
Posts: 849
Joined: Sat Mar 17, 2018 5:53 pm

Re: Wiki - Kiddie tax update

Post by HereToLearn »

LadyGeek wrote: Sat Sep 18, 2021 3:33 pm Unfortunately, sscritic has declined to participate further in this discussion. Nothing is wrong, it's just too difficult to work at this level of detail by email.

gobel - If you can provide the details of what you'd like to see, I'll incorporate them in the wiki.

HereToLearn - What would you like to put in the article?
I wish I understood the situation enough to be able to write up something useful. I searched the topic 'Kiddie Tax for Summer Stipend' and came across several threads where I sought clarification on the subject.
jaj2276
Posts: 558
Joined: Sat Apr 16, 2011 5:13 pm

Re: Wiki - Kiddie tax update

Post by jaj2276 »

I doubt I can provide accurate information on this topic as it applies to the wiki (sscritic's concerns) but I wish this particular wiki was constructed differently.

I filed a tax return for my oldest (age 5) in 2020 and I still don't know whether I needed to. Some high level questions I had:

-- I had capital gains due to tax gain harvesting AND dividends. Are these treated equally as unearned income? Is there ever any difference between the two? What if I had LT/ST capital gain distributions from the holdings themselves as well?
-- Is there something different about the first $1100 and the second $1100 as it pertains to the statement "no tax due if unearned income < $2200"? I think I understand the first $1100 to be the standard deduction and the second $1100 to be the 0% tax bracket. But does < $1100 imply no return and > $1100 imply tax return needed but possibly no tax due?
-- What scenarios (if any) would allow me to choose not to file a tax return for the child but rather just include their income on my tax return?
-- My daughter's tax was $9 on the $38 of income > than $2200 ($2238 total). That seems high. Is that because they used my capital gains rate (20% + 3.8%)? Is/was there an election to not use my rate?

I think there are three different types of "kids":

1) Unearned income only
2) Earned + Unearned income
3) Earned income only

Furthermore, I think there are two goals when people are researching this topic:

1) Do I have to file a tax return for my child?
2) Will my child owe any tax?

If the wiki was set up as a flow chart then IMO that might be easier to follow than having to wade through a wiki that tries to explain the kiddie tax coming from all angles. There could be some duplication in each section but I think that cost is worth the duplication.

So something like (understand that my answers might be incorrect, just trying to show a flowchart example):

IF your child only has unearned income (dividends, capital gains distributions, capital gain sales), skip to SECTION 1
IF your child has earned and unearned income, skip to SECTION 2:
IF your child only has earned income, skip to SECTION 3:

SECTION 1 (Unearned income only):
Does the total amount of unearned income add up to less than $1100?
YES -- No tax due. No return required.
NO -- Does the amount add up to less than $2200?
YES -- ???? No tax due but tax return required(??)
NO -- Tax return due(??), tax likely(??).
User avatar
gobel
Posts: 344
Joined: Mon Feb 08, 2021 4:50 pm

Re: Wiki - Kiddie tax update

Post by gobel »

yeah, it's much easier answering specific questions than writing a wiki! I'm not clear if the wiki is trying to give deep background info (like the frequent references to the actual law sections) or just basic info and then refer to the IRS pubs. Ie is it a beginners guide or a research report? Seems like most people on the threads are just asking what is kiddie tax and whether they are affected.

Pub 929 part 2 has all the info: https://www.irs.gov/publications/p929#e ... 1000203791
Our general section is basically this first paragraph, but ours is less clear. Note it also mentions that the child does not have to be a dependent (a very frequent question here). Further down it gives 2 very detailed flowcharts of whether to use 8814 or 8615. It also mentions the Jan 1 birthday anomaly for counting age.

I like the original wiki page better. It could be enhanced to answer some typical questions/confusion. But simple stuff could be to update the "in general" section with text from 929 (to remove the obsolete trust references). Our last bullet there also refers to the unusual $1064 saving and "Tax loss carryover" section that was tacked onto the end, which I think should be removed.
User avatar
gobel
Posts: 344
Joined: Mon Feb 08, 2021 4:50 pm

Re: Wiki - Kiddie tax update

Post by gobel »

jaj2276 wrote: Sun Sep 19, 2021 1:30 pm -- What scenarios (if any) would allow me to choose not to file a tax return for the child but rather just include their income on my tax return?
-- My daughter's tax was $9 on the $38 of income > than $2200 ($2238 total). That seems high. Is that because they used my capital gains rate (20% + 3.8%)? Is/was there an election to not use my rate?

If the wiki was set up as a flow chart then IMO that might be easier to follow than having to wade through a wiki that tries to explain the kiddie tax coming from all angles. There could be some duplication in each section but I think that cost is worth the duplication.
Here are the figures from 929 which answers this question (and the $9 tax on $38 sounds correct. note also at the child's rate, the 2nd $1100 can actually result in up to $110 tax, not always $0, if it's not ltcg or qdiv):


Figure 1. Can You Include Your Child's Income on Your Tax Return?

Image

Figure 2. Does Your Child Have To Use Form 8615 To Figure Their Tax?

Image
jaj2276
Posts: 558
Joined: Sat Apr 16, 2011 5:13 pm

Re: Wiki - Kiddie tax update

Post by jaj2276 »

gobel wrote: Sun Sep 19, 2021 2:01 pm
jaj2276 wrote: Sun Sep 19, 2021 1:30 pm ....
Thanks for those! I suggest we make these two figures from the IRS site prominent in the wiki as I think that will answer a lot of questions.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

gobel wrote: Sun Sep 19, 2021 1:44 pm ...I like the original wiki page better. It could be enhanced to answer some typical questions/confusion. But simple stuff could be to update the "in general" section with text from 929 (to remove the obsolete trust references). Our last bullet there also refers to the unusual $1064 saving and "Tax loss carryover" section that was tacked onto the end, which I think should be removed.
Sure. I'll add the IRS flowcharts as you've noted.

Remember that nothing is ever lost in the wiki. All you need to do is look at the "View history" tab in the top-right corner of any wiki page. sscritic's updates can be restored at any time.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

How's this look? User:LadyGeek/Kiddie tax

Changes:

- Revised introduction for readability.
- Removed the Trust statement in the "The kiddie tax in general" section.
- In the introduction, I added note defining unearned income from IRS Publication 929. (Requested by sscritic because the flowchart uses the term before it's defined in the publication.)
- Added the flowcharts
- Removed the blind child examples. (Does not represent a typical case.)

Here's the previous version supplied by sscritic (before the changes were applied): Revision as of 19:36, 16 September 2021

I don't like removing examples, but the blind child didn't appear to be helpful (as discussed in this thread). If anyone would like to supply additional examples, post them here.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
gobel
Posts: 344
Joined: Mon Feb 08, 2021 4:50 pm

Re: Wiki - Kiddie tax update

Post by gobel »

I think the updates look good. Here are some minor comments:
  • Footnote 3 and 4 are the same thing
  • In Note 2, maybe add 2 words 'You won’t find the term "kiddie tax" in'
  • In the Intro, maybe add 2 words 'Kiddie tax is a tax imposed on a child's
  • In the In General section, item 2, remove "but given the high tax rates for trusts, it might also result in paying lower tax"
  • Under History, or maybe as a separate section, we could still mention that some income shifting is possible. This was a bullet before which got removed (I was only saying the 2nd part was a bit unusual). I commented before about that being the most common question people ask about - shifting up to 2200 LTCG or STCG to their kids and selling it. Maybe that comment could be put here, or as a separate section, or as a bullet somewhere.
  • Under "Taxation of children with no earned income", under 4th bullet, the next 2 should be sub-bullets (the 0% and 10% lines)
  • The 4 examples are good, although I think should be reordered from simplest to complex: 4, 3, 1, 2
  • Example 4 could have the words "compared to selling it yourself" tacked onto the end.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

I have incorporated your minor comments: User:LadyGeek/Kiddie tax

The prior version: Revision as of 19:09, 20 September 2021

Does this version look "good enough" to replace the live page? Kiddie tax

If anyone else has a suggestion or correction, please post here.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
fyre4ce
Posts: 1622
Joined: Sun Aug 06, 2017 11:29 am

Re: Wiki - Kiddie tax update

Post by fyre4ce »

Finally had a chance to do a quick read-thru of the page. A few comments in no particular order:
  • It might be good to have the "history and intent of kiddie tax" as the first section, or possibly as part of the header (it's a short section) to contextualize the page for readers.
  • The page should say high up whether the term "kiddie tax" applies to the child's return, child's income taxed on a parent's return, or both. (Pretty sure the answer is both, depending on the situation)
  • The first rule ("If the child's interest, dividends and other unearned income total more than $2,200 in 2020 or 2021 (twice the basic standard deduction for a dependent minor of $1,100, indexed for inflation[note 3]).") is a conditional statement without a "consequent", ie. If P, then __?___. This should be fixed; it's hard for me to figure out what it's saying.
  • The list should include conditions where the child must file their own tax return
  • The first two examples in "Taxation of children with earned income" don't include any earned income. Maybe put these into the "Taxation of children with no earned income" section?
  • One common situation where children have unearned income is 18-24 full-time students and a pre-Secure Act inherited IRA kicking off RMDs. Maybe worth mentioning this as one of the examples?
  • It's never been clear whether the "taxed at the parents' rate" from Form 8615 takes into account phase-ins and phase-outs (eg. phase-out of child tax credit), which as we know can raise one's marginal tax rate well above the bare bracket rate. Reading through the Form 8615 instructions, it looks like it calculates the excess tax based on the rates but does not calculate the entire return, and so would exclude other effects. This may be worth mentioning.
  • One common question that brings up kiddie tax is parents looking to pay their kids to generate earned income for contributions to Roth IRAs, deduct business expenses, etc. It might be worth adding a discussion of legal ways kids can actually earn an income.
That's all for now. I probably won't have much more time to commit to this for a little while. Props for taking on a complex but useful topic!
jstorz
Posts: 41
Joined: Fri Sep 04, 2020 5:44 pm

Re: Wiki - Kiddie tax update

Post by jstorz »

Note that by gifting appreciated securities to a child, one can save at most $165 per year per child in capital gains tax in 2020 or 2021 (if in the 15% Long Term Capital Gains (LTCG) bracket).
$1100 * 0.15 = $165, but if a child's return is filed separately with no earned income, wouldn't it be double that? Since the second $1100 is taxed at the child's rate.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

The wiki has been revised as noted below: User:LadyGeek/Kiddie tax

As I've stated previously, this is a topic that I don't have experience to make authoritative changes on my own. I'm deferring to the experts to provide the examples and content as fyre4ce suggests below.

If anyone would like to contribute, please post here and myself (or another wiki editor) will incorporate your comments.
fyre4ce wrote: Wed Sep 22, 2021 11:30 am Finally had a chance to do a quick read-thru of the page. A few comments in no particular order:
  • It might be good to have the "history and intent of kiddie tax" as the first section, or possibly as part of the header (it's a short section) to contextualize the page for readers.
    --> Done.
  • The page should say high up whether the term "kiddie tax" applies to the child's return, child's income taxed on a parent's return, or both. (Pretty sure the answer is both, depending on the situation)
    --> The first sentence in Topic 553 says "There are two rules that may affect the tax and reporting of the investment income..." which is stated in the "The kiddie tax in general" general section. To me, this means both and I'm not sure it needs to be stated elsewhere.
  • The first rule ("If the child's interest, dividends and other unearned income total more than $2,200 in 2020 or 2021 (twice the basic standard deduction for a dependent minor of $1,100, indexed for inflation[note 3]).") is a conditional statement without a "consequent", ie. If P, then __?___. This should be fixed; it's hard for me to figure out what it's saying.
    --> Fixed. I copied it from Topic 553.
  • The list should include conditions where the child must file their own tax return
    --> OK, but I don't have the experience to make this update.
  • The first two examples in "Taxation of children with earned income" don't include any earned income. Maybe put these into the "Taxation of children with no earned income" section?
    --> Examples moved, thanks.
  • One common situation where children have unearned income is 18-24 full-time students and a pre-Secure Act inherited IRA kicking off RMDs. Maybe worth mentioning this as one of the examples?
    --> OK, but I don't have the experience to create an example.
  • It's never been clear whether the "taxed at the parents' rate" from Form 8615 takes into account phase-ins and phase-outs (eg. phase-out of child tax credit), which as we know can raise one's marginal tax rate well above the bare bracket rate. Reading through the Form 8615 instructions, it looks like it calculates the excess tax based on the rates but does not calculate the entire return, and so would exclude other effects. This may be worth mentioning.
    --> OK, but I don't have the experience to add a mention on my own.
  • One common question that brings up kiddie tax is parents looking to pay their kids to generate earned income for contributions to Roth IRAs, deduct business expenses, etc. It might be worth adding a discussion of legal ways kids can actually earn an income.
    --> OK, but I don't have the experience to add a discussion
That's all for now. I probably won't have much more time to commit to this for a little while. Props for taking on a complex but useful topic!
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

jstorz wrote: Wed Sep 22, 2021 3:04 pm
Note that by gifting appreciated securities to a child, one can save at most $165 per year per child in capital gains tax in 2020 or 2021 (if in the 15% Long Term Capital Gains (LTCG) bracket).
$1100 * 0.15 = $165, but if a child's return is filed separately with no earned income, wouldn't it be double that? Since the second $1100 is taxed at the child's rate.
Can an expert please answer this question?

Otherwise, is the content in the draft page "good enough" to go live? We can always update the page with more examples later.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
dodecahedron
Posts: 5809
Joined: Tue Nov 12, 2013 12:28 pm

Re: Wiki - Kiddie tax update

Post by dodecahedron »

fyre4ce wrote: Wed Sep 22, 2021 11:30 am Finally had a chance to do a quick read-thru of the page. A few comments in no particular order:
  • It might be good to have the "history and intent of kiddie tax" as the first section, or possibly as part of the header (it's a short section) to contextualize the page for readers.
Yes! I think the history is important because the changes to the law over time have led to confusion. The unofficial name "kiddie tax" and the IRS continuing use of the term "certain children" have contributed to this. It can be a trap for the unwary.

Originally, the kiddie tax just applied to dependent children under age 14. At that time, the use of the term kiddie tax was understandable.

Many people wrongly still think that the kiddie tax is just applicable to literal kiddies. But the law has expanded who counts as a kiddie. (Details at end of this post.) Under current law, even a financially independent young adult son or daughter under age 24 in grad school or professional school if s/he does not provide more than half of his/her own support from their *earned income* may be subject to the kiddie tax. (This can be true even if s/he has not gotten any support or gifts from his parents in recent years.)

This is particularly salient in 2020 and 2021 when many financially independent young adults have been using significant amounts of unemployment benefits towards their support. Unemployment compensation is not considered earned income under IRS rules. Fortunately, the $10,200 exclusion for unemployment benefits in 2020 greatly mitigated the kiddie tax problem for Tax Year 2020, but under current law all 2021 unemployment benefits will be taxable and subject to kiddie tax for those who are defined as "kiddies" or "certain children" as the IRS prefers to call them.

Further details of history:

Kiddie tax started in 1986 as part of the landmark Tax Reform Act of 1986. (Kiddie defined as child under 14.)

Kiddie tax expanded in 2006 to include children between age 14 and 17.

Kiddie tax further expanded in 2008 to include children through age 18 *and* students under 24, whether dependent or nor nondependent unless the student provides more than half their own support from their own *earned* income.

Note: the IRS defines a student as "enrolled at least half-time for at least five months during the tax year." So, for example, a student who was just enrolled for Jan through May would be considered a student for this purpose. (Also, many colleges consider enrolling for as little as 6 credit hours to be "enrolled at least half-time.")

(A few other exceptions exist: if both of the student's parents have died, no kiddie tax applies. Also, if the student is married and files a joint return with their spouse, no kiddie tax applies.)
User avatar
Topic Author
LadyGeek
Site Admin
Posts: 75774
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki - Kiddie tax update

Post by LadyGeek »

^^^ Do you have any authoritative citations for the wiki? Also, a top-level description that could be put in the wiki?

I found some older articles, but there were changes in the 2017 Tax Cuts and Jobs Act: Kiddie tax 2020: Rules and Rates for Unearned Income
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Post Reply