If you have children, you may have heard of the “Kiddie Tax,” and wondered what it is and how it may affect you. Continue reading to find out more about its origins, how it is taxed and what changes are underway for 2024.
What is the Kiddie Tax?
Congress introduced the Kiddie tax 1986 to prevent parents from taking advantage of a tax loophole: Shifting wealth into their children’s name to avoid paying taxes on their taxable income. Before then, children’s investments were taxed at the child’s presumably lower tax rate.
The Kiddie Tax is a part of income tax rules that apply to individuals under 18 years and full-time students under 24 years of age. If the child’s unearned income, or investment income, is more than the Kiddie Tax threshold for the tax year, then the child must pay tax on any unearned income over the threshold. That means it gets taxed at the higher of the parents’ tax rate or the child’s tax rate. The IRS adjusts the Kiddie Tax for inflation each year.
The Kiddie Tax only applies to unearned income. It does not apply to earned income—the child’s salary or wages from working. That income is taxed at the child’s rate. However, the Kiddie Tax will still apply to the child’s unearned income if the requirements are met.
Kiddie Tax rules for 2024
To calculate the Kiddie Tax, first determine the child’s taxable income:
Child’s Net Earned Income + Child’s Net Unearned Income – Child’s Standard Deduction = Child’s Taxable Income
The first $1,250 of a child’s unearned income is tax-free, and the next $1,250 is subject to the child’s tax rate. Any additional earnings above $2,500 are taxed at the greater of the child’s or the parents’ tax rate.
For 2023, a child’s standard deduction amount is the greater of $1,250, or the sum of $400 plus the child’s earned income, if you can claim the child as a dependent. Otherwise, the standard deduction for a single filer is $13,850.
Below are the standard deductions for 2023.
Filing status | 2023 standard deduction |
Single | $13,850 |
Married filing jointly | $27,700 |
Married filing separately | $13,850 |
Head of household | $20,800 |
For example, if a dependent child has no earned income and $3,500 of unearned income, $1,000 would be subject to the Kiddie Tax.
Kiddie Tax applicable Income
The Kiddie Tax applies to dependent children who are younger than 19 years old, or who are full-time students and between the ages of 19 and 23.
What are exceptions to the Kiddie Tax?
Probably the most important exception to the Kiddie Tax is when the child spends her or his own earned income, and that earned income is more than half the cost of their support.
Another exception is for children who are married and file a joint tax return. In that case, there’s no Kiddie Tax on the couple’s earned income, from wages, salary, tips, or self-employment.
A child’s unearned income may include:
- Taxable interest
- Dividends
- Capital gains
- Taxable scholarships
- Income produced by gifts from grandparents
- Income produced by custodial accounts under the Uniform Gifts to Minors Act (UGMA)
Tax rates and implications of the Kiddie Tax
The IRS sets specific limits on the types of income and the tax rates. Earned income will be taxed at the child's rate above their applicable standard deduction, which is equal to their earned income plus $400 (or $1,250, whichever amount is larger), up to a maximum of $13,850 in 2023.
At what age does the Kiddie Tax stop?
The Kiddie Tax only applies to dependent children who are younger than 19 years old, or who are full-time students and between the ages of 19 and 23. So any child over 18 years old who is not a full-time student, or any child over 24, doesn’t need to pay a Kiddie Tax.
What form do I need to use??
You would use Form 8615 to figure the child's tax on unearned income over $2,300 if the child is under age 19, and in certain situations if the child is older. We go into more detail on that below. To whom does the Kiddie Tax apply?
You’d attach Form 8615 to the child’s tax return if all the following conditions are met:
- The child's unearned income was more than $2,300.
- The child meets one of the following age requirements:
- The child was under age 19 at the end of the tax year,
- The child was age 18 at the end of the tax year and didn't have earned income that was more than half of their support, or
- The child was a full-time student and at least age 19 and under age 24 at the end of the tax year, and the child didn't have earned income that was more than half of their support.
- At least one of the child's parents was alive at the end of the tax year.
- The child is required to file a tax return for the tax year.
- The child does not file a joint return for the tax year.
If the child only has unearned income of less than $10,000 from interest and dividends, the parent(s) may pay the taxes by including the income on their own return using Form 8814.
More questions about the Kiddie Tax? Find a local Tax Pro today. We are here for you during tax season and year-round to answer any and all tax questions you may have.
