Kiddie Tax

What is the Kiddie Tax?

Kiddie Tax is a tax law prevalent in the United States of America and it imposes a tax on unearned passive income such as interest, dividend, rentals, capital gains, etc. of a child less than nineteen years old (or less than twenty-four years and a full-time student). If the investments held and unearned income of the child exceeds the prescribed annual limit, then tax is levied in the hands of the child irrespective of the fact whether the child is dependent or not.

How Does it Work?

Before kiddie tax was introduced, parents would invest in the name of their child or would gift the investments and other assets to the children, and the resultant income will be taxed at the lower rate applicable to a child’s income. Thus, by the introduction of this tax, the revenue department was able to end the loophole that was being misused by the parents.

Kiddie Tax

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How to Calculate Kiddie Tax?

In order to calculate the tax, one needs to calculate the taxable income of the child in the first instance.

Child’s Taxable Income = Child’s Net Earned Income + Child’s Net Unearned Income – Child’s Standard Deduction.

Now, the earned income of the child will be taxed as per the applicable normal rate, and the unearned incomeUnearned IncomeUnearned income refers to any additional earnings made from the sources other than employment, such as returns on investments, dividends on bonds and equities, interest on savings, etc.read more in excess of $2,200 is levied with following rates of kiddie tax:

Kiddie Tax Calculation

However, incomes such as long-term capital gains are subject to different tax rates. The rate applicable is 0% up to $2,650, 15% from $2,651 to $12,950 and 20% above $12,950.

Example of Kiddie Tax

You can download this Kiddie Tax Excel Template here – Kiddie Tax Excel Template

A person name Jacob aging 16 years earned an unearned income of $15,000 during a tax year.

Solution:

Calculation of Child’s taxable income will be –

Example

Child’s Taxable Income = Child’s Net Unearned Income – Child’s Standard Deduction

  • Child’s Taxable Income = $15,000 – $1,100 = $13,900

The taxable income is calculated by deducting the amount of standard deduction amounting to $1,100 from the unearned income amounting to $15,000. The resultant taxable income comes out to be $13,900.

Kiddie tax can be calculated as follows:

Example 1
  • Unearned income up to $2,200 shall be the exempt and remaining amount of $11,700 shall be taxed as follows:
  • The kiddie tax comes out to be $2,708.

Requirements of Kiddie Tax

Reporting and levyLevyA levy is a lawful process where the debtor's property is seized when the debtor cannot pay the outstanding debts. It is different from liens, as a lien is only a claim against a property, whereas a levy is an actual property takeover to fulfill the obligation.read more of kiddie tax are affected as follows in two situations:

  • If the unearned income of the child exceeds $2,200, the tax may be levied on the same.
  • If the income of the child includes only interest and dividend income and the total of that unearned income does not exceed $11,000, parents have an option to include the said income in their return rather than filing a separate return of the child.

Form 8615 shall be filed for kiddie tax. The same shall be filed in the name of the child if the following conditions are met:

  • The unearned income of a child exceeds $2,200.
  • Any of the following conditions are met with respect to age:
    • The age of the person does not exceed 18 years at the end of the tax year.
    • The age of the person equals 18 years at the end of a tax year, and the earned income of the person does not exceed half of his support’s income.
    • The age of the person is at least 19 but less than 24 years at the end of the tax year, who is a full-time student, and the earned income of the person does not exceed half of his support’s income.
  • At least one of the parents was alive at the end of the tax year.
  • The tax return is not to be filed for the tax year.
  • A joint return is not being filed for the tax year.

Conclusion

Kiddie tax return shall be filed after giving proper consideration to the applicable tax rate based on the kind of income and taking into account the standard deduction available as per tax laws. Also, one shall consider whether the income can be considered in the return of the parent if it specifies the conditions mentioned in the article.

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