What is the Kiddie tax and when does it apply?

By Jo-Ann Martin

So you’re thinking your child doesn’t have to file an income tax return. Think again! Even though Junior is a minor, he could be subject to the Kiddie Tax.

What is the Kiddie Tax?

It’s a law that was passed under the Tax Reform Act of 1986 to discourage wealthy individuals from transferring investments to their children in order to take advantage of the child’s lower tax rates. 

It applies to a child with unearned income who is 18 years of age or under—or dependent full-time students between the ages of 19 and 24. The Kiddie Tax applies to most unearned income that a child receives but doesn’t apply to any salary or wages earned by the child, which is taxed at the child’s ordinary rate.

For tax year 2021, the Kiddie Tax rule kicks in when a child’s unearned income exceeds $2,200 ($2,300 for tax year 2022).

How does the rule work?

The first $1,100 is not taxed because of the child’s standard deduction; the next $1,100 is then taxed at the child’s marginal tax rate. After that any unearned income in excess of $2,200 must be taxed at the parents’ highest tax rate.

So does Junior have to file an income tax return because his unearned income exceeds the applicable threshold? Maybe not. In some cases, the parents can elect to include their child’s unearned income on their own income tax return rather than have the child file his/her own return.

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Jo-Ann Martin


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