Introduced as part of the Tax Reform Act of 1986, the kiddie tax prevents parents from shifting wealth into their children’s names to reduce their tax liability.
What is kiddie tax?
The kiddie tax was established as part of the Tax Reform Act of 1986 to prevent parents from taking advantage of a tax loophole by shifting wealth into their children’s name to avoid paying taxes at a higher rate. Before then, children’s investments were taxed at the child’s presumably lower rate.
Kiddie tax is a special set of income tax rules that applies to individuals under 18 years and full-time students under 24 years. If the child’s unearned income — investment income — is more than the kiddie tax threshold for the tax year, then the child’s unearned income over the threshold is subject to the kiddie tax and gets taxed at the parents’ marginal tax rate rather than the child’s tax rate. The kiddie tax threshold is adjusted for inflation each year.
Kiddie tax does not apply if the child earned any salary or wages from working; that income is then taxed at the child’s rate. However, if the requirements are met, the kiddie tax will still apply to the child’s unearned income.
What is the kiddie tax limit?
The kiddie tax threshold, adjusted each year for inflation, is the following for each tax year:
- 2022: $2,300
- 2023: $2,500
- 2024: $2,600
Who is subject to kiddie tax?
Children are subject to kiddie tax if they meet age and support requirements under the Internal Revenue Code (IRC). Kiddie tax applies to children who are:
- 17 years old or younger at the end of the tax year, as support requirements are not relevant for children under 18
- 18 years old at the end of the tax year only if their earned income is less than or equal to 50% of their “support”
- 19 to 23 years old if their earned income is less than or equal to half of their “support” and they’re a full-time student
Kiddie tax does not apply to children for which any of the following are true:
- Had no living parents as of the end of the tax year
- Were married and filed a joint tax return for the year
- Are not required to file a tax return for the tax year
What are support requirements?
Support requirements under kiddie tax rules state that “support” includes food, shelter, clothing, medical care, and education. The overall amount of a parent’s support of a child aged 18-23 can affect whether the child's unearned income is subject to the kiddie tax. Support requirements are not relevant for children under 18.
What are the kiddie tax rules?
Kiddie tax applies to the unearned income of a child subject to the kiddie tax regime. Earned income is not subject to kiddie tax.
Unearned income subject to kiddie tax includes:
- Taxable interest
- Capital gains, including capital gain distributions
- Taxable portion of Social Security or pension benefits paid to the child
- IRA distributions
Earned income not subject to kiddie tax includes:
- Other compensation for personal services
- Distributions from certain qualified disability trusts
How is kiddie tax calculated?
Kiddie tax is calculated by determining the child’s tax liability under two scenarios and taking the larger amount:
- Calculate the tax that would be imposed if the kiddie tax rules didn't apply.
- Calculate the tax that would be imposed if the kiddie tax rules didn't apply and if the child's taxable income for the tax year were reduced by the child's “net unearned income,” then add the child's share of the “allocable parental tax.”
How do you calculate net unearned income?
How you calculate net unearned income is based on whether the child has any earned income and whether they itemize their deductions. Under the kiddie tax rules, net unearned income is the portion of the child’s adjusted gross income that is not attributable to earned income. A child's net unearned income can't be more than the child's taxable income.
How do you calculate allocable parental tax?
You calculate allocable parental tax by determining the tax that would be imposed on the parent's taxable income without regard to the kiddie tax rules. This hypothetical amount is then subtracted from the tax that would have been imposed on the parent's taxable income if the parent included the net unearned income of all that parent's children who are subject to the kiddie tax rules.
How is kiddie tax reported?
Parents report kiddie tax on Form 8615 — “Tax for Certain Children Who Have Unearned Income” — which is attached to the child’s Form 1040. The parent's taxpayer identification number (TIN) must be included on the child's return, and the parent must provide the number to the child. If a child can't get the required information from a parent, the child — or legal representative — can request the necessary information from the IRS.
When both the parent and child meet certain requirements, the parent can elect to include the child's gross income in the parent’s gross income on the parent’s return. This parent election is made on Form 8814 — “Parent’s Election to Report Child’s Interest and Dividends” — and cannot be revoked. The child is then treated as having no gross income for the year and isn't required to file a return. Special tax calculation rules will apply to the parent’s return if they make this election.
How do you avoid kiddie tax?
You can avoid kiddie tax when the age, income, or support test — if applicable — is not met during the tax year. Reducing or eliminating a child's investment income by shifting to tax-free investments can minimize the impact of the kiddie tax or allow a child to avoid the kiddie tax rules.
For answers to commonly asked questions about claiming children on taxes, visit “Child and dependent care tax credit 101.”
This information was last updated on 02/16/2024.