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Monday, November 29, 2021

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Kiddie Tax Definition

What Is the Kiddie Tax?

The kiddie tax is a particular tax law created in 1986 to deal with funding and unearned income tax for people below 18 years of age—or dependent full-time college students below 24.

Key Takeaways

  • The kiddie tax prevents mother and father from avoiding taxes by transferring massive presents of inventory.
  • All unearned revenue over the brink is taxed on the guardian’s marginal revenue tax price slightly than the decrease baby’s tax price.
  • It applies to all kids who’re 18 years of age or below—or dependent full-time college students between the ages of 19 and 24.
  • The kiddie tax applies to most unearned revenue {that a} baby receives and doesn’t apply to any wage or wages.

How the Kiddie Tax Works

The kiddie tax is a tax imposed on people below a sure age (below 18 years previous, and full-time college students age 19-24 years previous), whose funding and unearned income is larger than an yearly decided threshold.

This rule is designed to stop mother and father from exploiting a tax loophole the place their kids are given massive presents of inventory. On this case, the kid would then realize any gains from the investments and can be taxed at a far decrease price in comparison with the speed the guardians face for his or her realized inventory features.

Below the kiddie tax legislation, all unearned revenue over the brink is taxed on the guardian’s marginal revenue tax rate slightly than the kid’s tax price. In 2021, unearned revenue below $1,100 qualifies for the standard deduction, the subsequent $1,100 is taxed on the baby’s tax price, which could be very low—typically zero %—after which something in extra of $2,200 is taxed on the guardian’s tax price, which may very well be as excessive as 37%.

Who and What the Kiddie Tax Applies To

As of 2021, the kiddie tax applies to all kids aged 18 and below on the finish of the tax yr, in addition to kids who’re dependent full-time students between the ages of 19 and 24. It doesn’t apply, nevertheless, to kids below these ages who’re married and file joint tax returns.

The kiddie tax contains unearned revenue a baby receives: curiosity, dividends, capital features, lease, and royalties. Any wage or wages the kid earns is just not topic to the kiddie tax.

Grownup kids who flip 19—or 25 within the case of dependent full-time college students—by the top of the tax yr aren’t topic to the kiddie tax. 

Historical past of the Kiddie Tax

The tax legislation initially solely lined kids below 14 years of age. Kids below the age of 14 can not legally work, which signifies that any revenue they obtained often got here from dividends or curiosity from bonds. Nonetheless, the tax authorities realized that some guardians would benefit from the scenario, after which give stock gifts to their older, 16-to-18-year-old kids.

The kiddie tax is a tax imposed on people below 18 years previous whose funding and unearned revenue is larger than an yearly decided threshold. The IRS taxes any revenue exceeding the predetermined threshold on the guardian’s tax price. The Tax Cuts and Jobs Act of 2017 briefly modified the kiddie tax to make use of the tax charges that apply to estates and trusts slightly than the tax price of the kid’s mother and father.

Nonetheless, the Additional Consolidated Appropriations Act 2020 retroactively modified it again to the guardian’s tax price. For 2018 and 2019 returns, taxpayers had been ready to make use of both the property tax charges or the guardian’s take price for calculating the kiddie tax. For 2020 and past, the guardian’s tax price applies.

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