Kiddie tax

Introduction.

The Kiddie Tax
The Kiddie Tax in general


 * Very complex
 * Applies if child is <24, still a dependent, and has >$2000 in unearned income
 * Anything over $2000 in unearned income is taxed at the parent's rate
 * For FULL DETAILS, see IRS Topic 553: Tax on a Child's Investment Income
 * Kiddie tax is calculated on Form 8615 and paid on child's return

Taxation of children with no Earned Income


 * The child (if a dependent) gets a Standard Deduction of $1000
 * This has the effect of:
 * The first $1000 of unearned income is untaxed
 * The next $1000 is taxed at the child's rate
 * 0% for QDI and LTCG
 * 10% for Interest and non-QDI

Taxation of children with Earned Income


 * The standard deduction is earned income +$350, but no more than the normal standard deduction of $6100 for a single person
 * This has the effect of the first $350 of unearned income is untaxed
 * The next $1650 is taxed at the child's rate
 * Can still realize $2000 of untaxed unearned income, but only $350 of that can be interest and non-QDI (vs $1000 for no job case)


 * Note that by gifting appreciated securities to a child, one can save at least $300 per year per child in capital gains tax (if in the 15% LTCG bracket) and up to $792 per year per child (if in the 39.6% bracket with tax loss carryforwards)