Kiddie tax

The kiddie tax rule can be found in the US tax code which "taxes certain unearned income of a child at the parent’s marginal rate, no matter whether the child can be claimed as a dependent on the parent’s return."

The kiddie tax in general
There are two rules may affect the tax and reporting of the investment income of certain children:
 * If the child's interest, dividends and other unearned income total more than $2,000 (indexed for inflation), part of that income may be subject to tax at the parent's tax rate instead of the child's tax rate.
 * If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to elect to include that income on the parent's return rather than file a return for the child.

The following characterizes the kiddie tax:


 * Very complex
 * Applies if child is <24, still a dependent, and has >$2100 in unearned income
 * Anything over $2100 in unearned income is taxed at the parent's rate
 * Kiddie tax is calculated on Form 8615 and paid on child's return

Taxation of children with no Earned Income
If the children have no earned income then:
 * The child (if a dependent) gets a Standard Deduction of $1050
 * This has the effect of:
 * The first $1050 of unearned income is untaxed
 * The next $1050 is taxed at the child's rate
 * 0% for qualified dividend (QDI) and long term capital gain (LTCG)
 * 10% for Interest and non-QDI

Taxation of children with Earned Income
If the children have earned income then:


 * The standard deduction is earned income +$350, but no more than the normal standard deduction of $6300 for a single person
 * This has the effect of the first $350 of unearned income is untaxed
 * The next $1800 is taxed at the child's rate
 * Can still realize $2100 of untaxed unearned income, but only $350 of that can be interest and non-QDI (vs $1050 for no job case)


 * Note that by gifting appreciated securities to a child, one can save at least $315 per year per child in capital gains tax (if in the 15% LTCG bracket) and up to $832 per year per child (if in the 39.6% bracket with tax loss carryforwards)