About the Kiddie Tax

“Kiddie Tax” is the term used for the tax on certain unearned income of children taxed at the parent’s rate instead of the child’s rate. Children typically are in a lower tax bracket than their parents and the Kiddie Tax was developed to prevent parents from lowering their tax liability by shifting investment income assets to their children. 

Kiddie Tax General Rules  

The Kiddie Tax rules apply when a child’s unearned income (investment income) is over $2,000.

•    If the child’s interest, dividends, and other unearned income total more than $2,000, the amount over $2,000 is taxed at the parent’s marginal tax rate if that rate is higher than the child’s.

•    If the child’s interest and dividend income (including capital gain distributions) total less than $10,000, the child’s parent may be able to elect to include that income on the parent’s return rather than file a return for the child.

For either rule to apply, the child must be required to Unearned income. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, taxable Social Security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

Earned income. Earned income includes wages, tips, and other payments for personal services performed. Earned income also includes taxable distributions from a qualified disability trust.

Support. A child’s support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.

Child’s income taxed at parent’s rate. Part of a child’s unearned income may be taxed at the parent’s tax rate the qualifications are met. The child’s tax is figured on a separate form (Form 8615) that must be attached to the tax return.

Beginning January 1, 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of the child’s modified adjusted gross income (MAGI) over a threshold amount.

Parent includes child’s income on parent return. A parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. A parent can elect to do this if all of the following conditions are met.

•    At the end of the tax year the child was under age 19 or under age 24, if a full-time student,

•    The child’s interest and dividend income was less than $10,000 for the tax year,

•    The child had income only from interest and divi-dends, which includes Alaska Permanent Fund dividends and capital gain distributions,

•    No estimated tax payments were made for the tax year, and no prior tax year’s tax overpayment was applied to the current tax year, under the child’s name and Social Security number,

•    No federal income tax was withheld from the child’s income under backup withholding,

•    The child is required to file a return unless the parent makes this election,

•    The child does not file a joint return for the tax year, and

•    The parent is the parent qualified to make the election or files a joint return with the child’s other parent.

The parent’s election to include child’s income on the parent return is figure on a separate form (Form 8814) that must be attached to the tax return. Beginning January 1, 2013, a parent who elects to report a child’s unearned income on his or her return may be subject to the NIIT. The parent must include the child’s income in figuring MAGI and add the child’s income to the parent’s net investment income.