What You Need to Know About Kiddie Tax
Kiddie tax is a tax law that was implemented in 1986 to prevent parents from taking advantage of lower tax rates by giving their children large gifts of stock that would be subject to the child’s lower tax rate on investment income.
When the program was created, the unearned portion of a child’s investment income under a specific threshold, $2,200, was considered tax-free, while the earned portion was subject to taxes at the child’s tax rate. Any income a child earned above the threshold was to be taxed at the guardian’s rate.
Although the past two years have seen major changes to the “Kiddie Tax,” with the passage of the “Further Consolidated Appropriations Act of 2020,” it has been restored to its original form. This means that a child’s earned income will continue to be taxed at the child’s individual tax rate. However, the tax for unearned income above the $2,200 threshold, will again be taxed at the parents’ tax rate. Importantly, these rules apply retroactively, so it is possible to amend 2018 and 2019 tax returns if resulting in a lower tax.
This tax currently applies if:
- The child has not reached the age of 19 by the close of the taxable year, or the child is a full- time student under the age of 24, and either of the child’s parents is alive at such time;
- The child does not file a joint return.
For more information or help in navigating the kiddie tax, please contact your wealth advisor and tax professional.
“Former kiddie tax rules restored,” journalofaccountancy.com
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