What is the Kiddie Tax?

How Does it Work?

Before kiddie tax was introduced, parents would invest in their child’s name or gift the investments and other assets to the children, and the resultant income will be taxed at the lower rate applicable to a child’s income. Thus, by introducing this tax, the revenue department could end the loophole that the parents were misusing.

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How to Calculate Kiddie Tax?

To calculate the tax, one needs to calculate the child’s taxable income in the first instance.

Child’s Taxable Income = Child’s Net Earned Income + Child’s Net Unearned Income – Child’s Standard Deduction.

Now, the earned income of the child will be taxed as per the applicable normal rate, and the unearned incomeUnearned IncomeUnearned income refers to any additional earnings made from the sources other than employment, such as returns on investments, dividends on bonds and equities, interest on savings, etc.read more over $2,200 is levied with the following rates of kiddie tax:

However, incomes such as long-term capital gains are subject to different tax rates. The rate applicable is 0% up to $2,650, 15% from $2,651 to $12,950 and 20% above $12,950.

Example of Kiddie Tax

A person name Jacob, aging 16 years, earned and unearned income of $15,000 during a tax year.

Solution:

Calculation of the Child’s taxable income will be –

Child’s Taxable Income = Child’s Net Unearned Income – Child’s Standard Deduction

  • Child’s Taxable Income = $15,000 – $1,100 = $13,900

The taxable income is calculated by deducting the standard deduction amounting to $1,100 from the unearned income amounting to $15,000. The resultant taxable income comes out to be $13,900.

Kiddie tax can be calculated as follows:

  • Unearned income up to $2,200 shall be exempt, and the remaining amount of $11,700 shall be taxed as follows:The kiddie tax comes out to be $2,708.

Requirements of Kiddie Tax

Reporting and levyLevyA levy is a lawful process where the debtor’s property is seized when the debtor cannot pay the outstanding debts. It is different from liens, as a lien is only a claim against a property, whereas a levy is an actual property takeover to fulfill the obligation.read more of kiddie tax are affected as follows in two situations:

  • If the child’s unearned income exceeds $2,200, the tax may be levied on the same.Suppose the child’s income includes only interest and dividend income, and the total of that unearned income does not exceed $11,000. In that case, parents can include the said income in their return rather than filing a separate return for the child.

Form 8615 shall be filed for kiddie tax. The same shall be filed in the name of the child if the following conditions are met:

  • The unearned income of a child exceeds $2,200.Any of the following conditions are met concerning age:The person’s age does not exceed 18 years at the end of the tax year.The person’s age equals 18 years at the end of a tax year, and the person’s earned income does not exceed half of his support’s income.The person’s age is at least 19 but less than 24 years at the end of the tax year, who is a full-time student, and the earned income of the person does not exceed half of his support’s income.At least one of the parents was alive at the end of the tax year.The tax return is not to be filed for the tax year.A joint return is not being filed for the tax year.

Conclusion

Kiddie tax return shall be filed after properly considering the applicable tax rate based on the kind of income and considering the standard deduction available per tax laws. Also, one shall consider whether the income can be considered in the parent’s return if it specifies the conditions mentioned in the article.

  • The person’s age does not exceed 18 years at the end of the tax year.The person’s age equals 18 years at the end of a tax year, and the person’s earned income does not exceed half of his support’s income.The person’s age is at least 19 but less than 24 years at the end of the tax year, who is a full-time student, and the earned income of the person does not exceed half of his support’s income.

This article has been a guide to What Kiddie Tax is. Here we discuss calculating kiddie tax and their example, work, and requirements. You can learn more about it from the following articles –

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