Understanding the Kiddie Tax

What parents need to know regarding Kiddie tax compliance in 2024

The Kiddie tax was enacted as part of the 1986 Tax Reform Act, designed to prevent parents from shifting income to their children to take advantage of the child’s lower tax rates. If applicable, under the Kiddie tax rules, once the child’s unearned income exceeds $2,600 (2024 threshold) it is taxed at their parents’ rates rather than the comparatively lower tax rates that would otherwise apply at the child’s level of income.

Who is affected by the Kiddie tax?

The Kiddie tax applies, if all of the following three requirements are met:

1. Your child is either:
   • Under age 18,
   • 18 and provides less than half of their own support, OR
   • Between the ages of 19 and 23, a full-time student and provides less than half of their own support.
   • Your child is required to file a tax return (Children must file a return if unearned income is greater than $1,250 or earned income over $13,850)
2. Your child does not file a joint return with another individual
3. One or both of the child’s parents are alive at the end of the year.

Which parent’s rate applies?

• Married parents filing joint return – Kiddie tax based on joint income
• Married parents filing separate returns – Kiddie tax based on income of parent with higher taxable income
• Divorced parents – Kiddie tax based on income of custodial parent

How is the Kiddie tax reported?

If your child files their own return, the Kiddie tax is calculated on unearned income and reflected on their return and paid when they file their income tax return.

• Note: If the parent’s taxable income is unknown by the April 15 deadline and an extension is filed for the parent, the child will also need to file an extension.

In some cases, parents may elect to report their child’s interest, ordinary dividends, and capital gains distributions on their own tax return. The Kiddie tax would then be added to the parent’s total tax liability.

Conditions where a parent can elect to report the child’s income on their tax return:

All eight conditions below must be met.

1. Your child was under age 19 (or under age 24 if a full-time student) at the end of the tax year.
2. Your child’s gross income was less than $12,500 for the tax year.
3. Your child had income only from interest and dividends (including capital gains distributions).
4. Your child did not make any estimated tax payments for the tax year and no overpayments from the previous tax year/ amended return were applied to the current tax year.
5. No federal income tax was withheld from your child’s income.
6. Your child is required to file a return unless you make a specific election.
7. Your child did not file a joint return for the tax year.
8. You must be the parent qualified to make the election or file jointly with your child’s other parent.

In some cases, it might be more beneficial for the child to file their own tax return, so before deciding to make an election to report your child’s income on your return, please consult your tax advisor.

Conclusion

The Kiddie tax ensures that income-shifting strategies don’t unfairly reduce tax liability. As a parent, understanding these rules can help you manage your child’s assets for tax efficiency. If you have specific questions or need further guidance, consult your Keiter Opportunity Advisor or refer to official IRS resources.

Source:
IRS Topic no. 553, Tax on a child’s investment and other unearned income (Kiddie Tax)