Kiddie Tax Applies to Children Under 18
Tax Increase Prevention and Reconciliation Act
A child subject to the kiddie tax pays tax at the rates that apply to trusts and estates on the child’s unearned income over $2,200 (in 2021) if that tax is higher than the tax the child would otherwise pay on it. The parents can instead elect to include on their own return the child’s gross income in excess of $2,200 (in 2021) if the child's only income is interest and dividend income (including capital gain distributions) and totals less than $11,000.
Under the old law, a child would have been subject to the kiddie tax if he or she had not attained age 14 before the close of the tax year and either parent of the child was alive at the end of the year.
Under the current law, a child is subject to the kiddie tax if he or she has not attained age 18 (or 24 if a full-time student and his/her earned income for the tax year does not exceed one-half of his support) before the close of the tax year; either parent of the child is alive at the end of the tax year; and the child does not file a joint return for the tax year.
Kiddie tax strategies. The opportunity to lower taxes, by transferring cash or income producing assets to children under 18 (24, full-time student), is curtailed by the kiddie tax. But investing a child's funds in one or more of the following can help to avoid the kiddie tax:
Also, it should be borne in mind that a family business can employ a child. The child's earning won't be subject to kiddie tax and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child's earned income that isn't sheltered by the standard deduction for a dependent will be subject to tax at the child's and not the parent's tax rate.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.
A child subject to the kiddie tax pays tax at the rates that apply to trusts and estates on the child’s unearned income over $2,200 (in 2021) if that tax is higher than the tax the child would otherwise pay on it. The parents can instead elect to include on their own return the child’s gross income in excess of $2,200 (in 2021) if the child's only income is interest and dividend income (including capital gain distributions) and totals less than $11,000.
Under the old law, a child would have been subject to the kiddie tax if he or she had not attained age 14 before the close of the tax year and either parent of the child was alive at the end of the year.
Under the current law, a child is subject to the kiddie tax if he or she has not attained age 18 (or 24 if a full-time student and his/her earned income for the tax year does not exceed one-half of his support) before the close of the tax year; either parent of the child is alive at the end of the tax year; and the child does not file a joint return for the tax year.
Kiddie tax strategies. The opportunity to lower taxes, by transferring cash or income producing assets to children under 18 (24, full-time student), is curtailed by the kiddie tax. But investing a child's funds in one or more of the following can help to avoid the kiddie tax:
- Savings bonds: Cash basis owners of Series EE and Series I bonds may defer reporting any interest (i.e., the bond's increase in value) until the year of final maturity, redemption, or other disposition.
- Municipal bonds: Such bonds produce tax-free income (although the interest on some specialized types of bonds may be subject to the AMT).
- Growth stocks: Stocks that pay little dividends and focus more on capital appreciation. The child could sell them after he turns 18 and possibly benefit from being in a low tax bracket.
- Mutual funds: Funds can be invested in mutual funds that concentrate on growth stocks and municipal bonds that limit current income and taxes. They may also limit risk through investment diversification.
- Real estate: Unimproved real estate that will appreciate over time and doesn't produce current income will limit the impact of the kiddie tax.
Also, it should be borne in mind that a family business can employ a child. The child's earning won't be subject to kiddie tax and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child's earned income that isn't sheltered by the standard deduction for a dependent will be subject to tax at the child's and not the parent's tax rate.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.