The “Kiddie” Tax or How Children Are Taxed

Tuesday, February 18 at 09:05 AM
Category: Personal Finance

Children are subject to income taxes just like their parents. However, there are some special rules that apply and some of them can get complicated. This is commonly called the “Kiddie” Tax.  This article provides some general information, but you may want to consult your tax advisor to better understand how your children are being taxed.

The General Rule
Generally, children are treated as separate taxpayers and their income is taxed at the same marginal rates as their parents. The tax table used to calculate their tax is the single filer table.  The lowest rate is 10 percent and the rates rise to 39.6 percent (for 2013 and 2014) for the highest levels of income.

Special Rules
These rules will apply to children under the age of 18, 18 year olds with earned income less than half of their support, and 19 to 23 year old students with earned income less than half of their support.

If a child has a job, their earned income is taxed regularly. In fact, for 2013, the first $6,100 is usually tax free (by taking advantage of the standard deduction). Then income is taxed at the child's marginal bracket, usually 10 percent. Even if the child has less than $6,100 of earned income, a tax return may still be necessary to get a refund of any taxes that were withheld at their job. For 2014, the first $6,200 is usually tax free.

If the child has unearned income from interest, dividends or capital gains, the rules get a bit more difficult. If the child meets any of the three criteria described above, the first $1,000 of unearned income is not taxed and the next $1,000 is taxed at the child's tax rate. All the unearned income above $2,000 is taxed to the child, but at the parent's tax rates. 

This complication, known as the Kiddie Tax, was enacted to prevent families from shifting large amounts of investment income to children to avoid having it taxed at the parent's higher rates. 

The Really Complicated Rules
The interaction between the Kiddie Tax and the parents' tax situation can become very complicated if the parents have an unusual tax issue like the Alternative Minimum Tax or relatively large amounts of capital gains. In those cases, a qualified tax advisor is a must.

The views of this article are for general information use only. Please contact a subject expert or tax advisor when specific advice is needed.

Tags: Financial Education, Tax
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