Kiddie Tax
What Is Kiddie Tax?
The kiddie tax is a tax rule that applies to a child’s unearned income, such as investment earnings, above a certain threshold. It was created to prevent parents from transferring investments to children to take advantage of lower tax rates.
Under this rule, some of a child’s income may be taxed at the parent’s tax rate.
Why It Matters
The kiddie tax ensures fairness in the tax system by preventing income shifting between parents and children. Families who invest in accounts for minors should understand how these rules may affect taxation.
This rule often applies to income generated by investments held in a child’s name.
How Kiddie Tax Works
The kiddie tax applies to certain children who have investment income above a specified threshold.
Key factors include:
- the child’s age
- the amount of unearned income
- the parents’ tax rate
Unearned income above the threshold may be taxed at the parent’s marginal tax rate.
Example
If a child earns significant investment income from stocks or mutual funds held in their name, part of that income may be taxed using the parents’ tax rate.
Kiddie Tax vs Earned Income
- Kiddie tax applies to unearned income like investments.
- Earned income such as wages is generally taxed at the child’s rate.
FAQs About Kiddie Tax
Who does the kiddie tax apply to?
Children with investment income above certain thresholds.
Does the rule apply to wages?
No. It primarily applies to investment income.
Why does the rule exist?
To prevent families from shifting income to lower-tax brackets.
Related Terms
