The kiddie tax is a tax imposed on the certain children. The net unearned income of a dependent child under 18 years of age or a child age 18 to under 24 who does not provide over half of his/her own support and is a full-time student is taxed at the parent’s rate.
The kiddie tax includes unearned income a child receives: interest, dividends, capital gains, rent, and royalties. Any salary or wages the child earns is not subject to the kiddie tax.
Before the Kiddie Tax, parents could save on taxes by putting investment accounts in a child’s name. Parents would gift stocks and other assets to their children, and income earned on the assets would be taxed at the child’s (lower) income tax rate, instead of the parent’s (higher) income tax rate. The Kiddie Tax closed this loophole by taxing children’s passive income at higher rates.
Parents may elect to include on their own return the unearned income of the applicable child provided that the income is between $1,100 and $11,000 and consists solely of interest, dividends, and capital gains distribution. A separate tax return must be filed for children who have unearned income that is greater than $11,000 or any amount of earned income.
The first $1,100 of a child’s unearned income is tax-free, and the next $1,100 is subject to the child’s tax rate. Any additional earnings above $2,200 are taxed at the child’s parents’ marginal tax rate.
2020 Child’s Unearned Income
Tax Rate
$0-$1,100
0%
$1,101-$2,200
Child’s rate
$2,201 and over
Parent’s rate
In 2020, a child’s standard deduction amount is the greater of $1,100, or the sum of $350 plus the child’s earned income, if the child can be claimed as a dependent. Otherwise, the standard deduction for a single filer is $12,400.
For example, if a dependent child has no earned income and $3,500 of unearned income, $1,300 would be subject to the Kiddie Tax and is taxed at their parents’ marginal federal income tax rate.
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