Kiddie Tax
Candlefocus EditorThe kiddie tax is a federal tax law that was implemented in 1986 to combat parents who attempt to avoid taxation by transferring large amounts of gifted stock to their children. With the kiddie tax, all unearned income for children under 18 years of age or dependent full-time students between the ages of 19 and 24 is taxed at the parents' marginal income tax rate instead of the child's lower tax rate. This tax applies to all forms of unearned income, including dividends, capital gains, and any interest or income derived from an inheritance.
When paying taxes on a child's unearned income, the thresholds used to determine the rate of tax owed have changed over the years. In 2022, the standard deduction amount of unearned income is $1,150, with a tax rate of 12% applied to income ranging from $1,150 to $2,650, a rate of 22% for income ranging from $2,651 to $7,650, and a rate of 24% for any income above $7,650.
In addition, unearned income is subject to the additional 3.8% net investment income tax, which was part of the American Taxpayer Relief Act of 2012. This applies to couples who earn more than $250,000 in adjusted gross income in a given year and for single filers who earn more than $200,000.
While the purpose of the kiddie tax is to protect against tax avoidance, it can cause some families to owe more in taxes than they would have without it. For this reason, the kiddie tax law is something that any parent aware of its implications should consider when planning a financial strategy for their family.
Overall, the kiddie tax serves as an important tool in curbing parental tax avoidance, as it requires parents to pay taxes on certain types of unearned income that would have otherwise gone untaxed. Even though this tax increases the complexity of filing taxes, it is widely seen as a fair and beneficial system that ensures families are paying the proper amount in taxes.