Tax Insights

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Beware of Kiddie Tax – Part I

A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent’s highest marginal tax rate. This is referred to as the “kiddie tax,” and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.

Does the kiddie tax apply to your situation?

The kiddie tax applies if:

  1. The child has investment income greater than the annual inflation-adjusted amount ($2,100 for 2015 up from 2014 which was $2,000);
  2. At least one of the child’s parents was alive at the end of the tax year;
  3. The child is required to file a tax return for the tax year;
  4. The child does not file a joint return for the tax year; and
  5. The child meets one of the following requirements relating to age and income:
  • The child was under age 18 at the end of the tax year; or
  • The child was age 18 at the end of the tax year and the child’s earned income does not exceed one-half of the child’s own support for the year; or
  • The child was a full-time student who was under age 24 at the end of the tax year and the child’s earned income does not exceed one half of the child’s own support for the year (This does not include scholarships.)

This concludes part 1 of the kiddie tax rules. Part 2 will include computing the kiddie tax and which tax form to use.

By Danette Jespersen, EA