What is Kiddie Tax?
Kiddie Tax is applied to any of your child’s unearned income that exceeds a certain amount. This tax was created to discourage parents from shifting their investments into their children’s names in hopes of lowering their tax bills.
How is it taxed?
It used to be that the first $2,100 of unearned income was tax free; however, starting this year the rules have changed. This year, the first $1,050 is tax free; the second $1,050 is taxed at your child’s tax rate, and any unearned income over $2,100 is taxed at the parent’s tax rate.
Generally, if your child has unearned income, they qualify for the Kiddie Tax. There are two ways they wouldn’t qualify, and they are:
- The only income they have is earned.
- Their income is below the filing threshold.
How is it reported?
There are two ways for the Kiddie Tax to be reported: reporting it on their tax return or adding it to yours. According to the IRS, adding their unearned income to yours is only allowed as long as the following conditions are met:
- At the end of the tax year the child was under age 19 or under age 24, if a full-time student.
- The child’s interest and dividend income was less than $10,500 for the tax year.
- The child had income only from interest and dividends, which includes Alaska Permanent Fund dividends and ital gain distributions.
- No estimated tax payments were made for the tax year, and no prior tax year’s tax overpayment was applied to the current tax year estimated tax, under the child’s name and social security number.
- No federal income tax was withheld from the child’s income under backup withholding.
- The child is required to file a return unless the parent makes this election.
- The child does not file a joint return for the tax year.
- The parent is the parent qualified to make the election or files a joint return with the child’s other parent.
Keep in mind, if you are able to and choose to include it on your tax return, your taxable income will not only increase but you may also not qualify for some credits or deductions.
Do you have questions?
If your child qualifies for the Kiddie Tax and you have some questions that haven’t been answered above, please give me a call!
A Mazzo Accounting provides a variety of tax and accounting services to individuals and businesses in the Wyomissing, Reading, West Reading, Sinking Spring and Kenhorst areas, as well as towns and villages around the Greater Reading area. Our services for small to mid-size businesses include taxes, payroll services, accounting services, and bookkeeping services. We also provide a variety of services for individuals and they include tax return preparation as well as some accounting assistance.
Reference: https://www.irs.gov/taxtopics/tc553.html