Of the gifts you may give to your children this year, think carefully about whether offloading your investment income is one of them. This is because the IRS imposes the “Kiddie Tax” on children’s investment income. Despite its playful moniker, the Kiddie Tax can place a significant burden on parents caught unaware by its limitations. Read on to learn about the Kiddie Tax Rules and the potential financial implications to you.

Kiddie Tax Rules?

For parents with sizeable investment income, it is tempting to offload a portion onto your child. That way, you can capitalize on the child’s lower tax bracket and, in effect, lower the total tax liability for the family. The IRS imposed the Kiddie Tax Rule to discourage parents from doing this.

The Kiddie Tax refers to the tax imposed on children’s unearned income beyond certain limits. Generally, this applies when the unearned income of a child is more than $2,100.

Past that $2,100 threshold, the Kiddie Tax kicks in. This means the excess can be taxed at the parents’ marginal tax rate. The amount under the income limit would be taxed at the child’s (typically lower) rate.

Who does the Kiddie Tax hit?

Depending on how you choose to report your child’s income, the Kiddie Tax applies if the child:

  • Is under age 18 at the end of 2015
  • Was age 18 at the end of 2015 and did not have earned income exceeding half of the child’s support
  • Was a full-time student aged at least 19 but under 24, and did not have earned income exceeding half of the child’s support.

In addition to earned income being exempt from the Kiddie Tax, there are other reasons that a child’s income would not be subject to the Kiddie Tax, including:

  • Children who were not required to file a return because they did not have enough income to report.
  • Children who earned more than half of their required support. In this scenario, the child is not likely to be someone else’s dependent.
  • Anyone who files a married filing jointly tax return.

What Kiddie Tax Forms Do You Need For The IRS?

If you are required to pay the Kiddie Tax, calculate the tax owed using Form 8615 and attach it to the child’s tax return if the child’s interest, dividends and other unearned income add up to more than $2,100 for 2015 and other required criteria cited in the form are met.

Alternatively, parents may elect to include their child’s income on their own tax return using Form 8814 instead of filing a tax return for the child if the child’s interest and dividend income (including capital gain distributions) add up to less than $10,000, and other required criteria cited in the form are met. For more information on reporting investment income subject to the Kiddie Tax, see Topic 505.

Manasa Reddigari

Manasa Reddigari

Manasa Reddigari is a freelance technical writer and small business owner whose insights have appeared in diverse digital publications. She has a passion for leveraging technology to reveal simple solutions for everyday business finance complexities. Visit www.scribmint.com to learn more about her work.
Manasa Reddigari

Latest posts by Manasa Reddigari (see all)

MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.