Difference between revisions of "Kiddie tax"

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m (Taxation of children with Earned Income: clarified standard deduction.)
m (Taxation of children with Earned Income: fixed another number)
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*The standard deduction is earned income +$350, but no more than the normal standard deduction of $6300 for a single person, and no less than the $1050 for children with no earned income.
 
*The standard deduction is earned income +$350, but no more than the normal standard deduction of $6300 for a single person, and no less than the $1050 for children with no earned income.
 
*This has the effect of the first $350 of unearned income is untaxed
 
*This has the effect of the first $350 of unearned income is untaxed
*The next $1800 is taxed at the child's rate
+
*The next $1750 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)
 
*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)
  

Revision as of 02:50, 18 December 2017

The kiddie tax rule can be found in the US tax code[1] 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."[2]

The kiddie tax in general

There are two rules may affect the tax and reporting of the investment income of certain children:[3]

  1. 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.
  2. 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 (limit for 2017 and 2018)
  • 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, and no less than the $1050 for children with no earned income.
  • This has the effect of the first $350 of unearned income is untaxed
  • The next $1750 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)

See also

References

  1. 26 U.S. Code § 1 - Tax imposed | LII / Legal Information Institute, viewed January 24, 2015.
  2. Samuel Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials 639 (Thomson West 2007) (2005).
  3. Tax Topics - Topic 553 Tax on a Child's Investment Income (Kiddie Tax), viewed January 24, 2015.

External links