Figuring Out the "Kiddie Tax" Is No Child's Play
The "Kiddie Tax" was imposed in 1986 to prevent parents from concealing investment income by putting accounts in their children's names. Before this, a significant portion of investment earnings held by a minor child, was tax-free. There has since been a great deal of tinkering in what tax rates apply to children and students up to 23-years-old.
Rules to Save By
The "Kiddie Tax" only applies to investment earnings classified as "unearned income." Wages and other earned income received by a child under 18 are taxed at the child's normal rate.
Children's investment income, up to $1,000, remains tax-free. The next $1,000 of income is taxable, but at a reduced tax rate. Once a child's annual earnings exceed $2,000, there are specific rules as to how the income should be taxed.
If a child's interest, dividends and other "unearned income" exceeds $2,100, part of that income could be assessed at the parent's tax rate instead of the child's tax rate. Refer to IRS Form 8615 for specific instructions.
Filing under 8615 could subject this income to the Net Investment Income Tax (NIIT), a 3.8-percent tax on any amount that exceeds $2,100 (if needed, use Form 8960 to calculate this tax). If filing Form 8615, the IRS outlines taxable tiers according to the following situations:
- The child was under age 18 at the end of the tax year.
- The child was age 18, but less than 19, at the end of the tax year, and the child's earned income didn't exceed half of the child's own support for the year. If the child is a full-time student and received a scholarship, it is excluded.
- The child was a full-time student between 19 and 23 years-old at the end of the tax year, and the child's earned income didn't exceed half of the child's own support for that year excluding scholarship(s).
- If a child's parents are married but filing separately, Form 8615 must be attached to the return filed by the parent with the higher taxable income must be entered on. Calculations get more complex for separated, unmarried, "unmarried for tax-filing purposes," or remarried parents.
If the child did not generate any earned income, and his or her only income was generated by interest and dividends not exceeding $10,500, that income can be included on the parent's return with a Form 8814 in lieu of an 8615. If filing an 8814, the IRS outlines taxable tiers according to the following situations:
- The child was under age 19, or a full-time student under age 24, at the end of the tax year.
- The child's interest and dividend income did not exceed $10,500.
- The child's only income came from interest, dividends, and capital gain distributions.
- Form 8814 must be attached to the parent's 1040.
For additional requirements and information on which of forms/method for filing may be based for your specific tax-filing situation, please refer to the IRS Publication 929.
What is a Form 8615?
Beginning in tax year 2020, a child's unearned income over $2,200 is taxed at the same rate as the parents' income. If your child has more than $2,200 in unearned income then you need to complete and file Form 8615 to report the amount of "kiddie tax" that is due.
You do not need to file Form 8615, Tax for Certain Children Who Have Unearned Income if your child has only earned income (for example, income received through a part-time job or self-employment) or if your child's unearned income was less than $2,200.
If your child satisfies all four of the following conditions then you must complete this form and file it with your tax return, whether or not the child is your dependent. (For the purposes of this form, "your child" includes your stepchild and your legally adopted child.)
- Your child has over $2,200 in unearned income
- Your child is required to file a tax return
- Your child is not filing a joint return
- Your child is
- under the age of 18 at the end of the year OR
- age 18 with earned income of no more than half of their own support OR
- age 19-23 at the end of the year AND a full-time student AND their earned income was not more than half of their support
Children who do not have at least one living parent at the end of the tax year do not have to file Form 8615.
Parents can also opt to file Form 8615 with an amended tax return (using Form 1040-X) to retroactively calculate the tax due on a dependent child's unearned income in 2018 or 2019. (During those tax years dependent children's unearned income above the specified threshold was calculated based on the condensed trusts and estates tax rate paid by estates and trusts, not the parents' individual tax rate. You can file an amended return using the parents' rate.)
Some parents may choose to report a child's unearned income on their own tax return, in which case you do not have to file Form 8615. Doing this may result in a higher amount of tax due.