Define: Kiddie Tax

The Kiddie Tax is a tax provision that applies to unearned income of children under the age of 19 (or under 24 if a full-time student). It aims to prevent parents from shifting their investment income to their children to take advantage of lower tax rates.

The Kiddie Tax applies to unearned income, which includes interest, dividends, capital gains, and certain other types of passive income. Earned income, such as wages or salaries, is not subject to the Kiddie Tax.

The Kiddie Tax is calculated at the parent’s marginal tax rate. It means that the child’s unearned income is added to the parent’s income, and the tax is determined based on the parent’s tax bracket.

Yes, there is an exemption for a child’s unearned income up to a certain threshold. For the tax year 2021, the exemption amount is $2,200. Any unearned income above this threshold will be subject to the Kiddie Tax.

Yes, parents have the option to include their child’s unearned income on their own tax return instead of filing a separate return for the child. This may be beneficial if the parents’ tax rate is lower than the Kiddie Tax rate.

Yes, if a child has earned income that exceeds half of their support and they file a separate tax return, they may be exempt from the Kiddie Tax. However, if the child is claimed as a dependent on their parents’ tax return, the Kiddie Tax will still apply.

Transferring assets to a trust for the child may help in reducing the impact of the Kiddie Tax. However, it is essential to consult with a qualified tax professional or attorney to ensure compliance with tax laws and understand the potential consequences of such transfers.

No, the Kiddie Tax only applies to children who meet the age and income criteria specified by the tax law. Once a child reaches the age threshold or earns income above the exemption amount, they are no longer subject to the Kiddie Tax.

No, the Kiddie Tax cannot be retroactively applied. It is based on the tax laws in effect for the specific tax year in question.

There are several strategies that can help minimize the impact of the Kiddie Tax, such as investing in tax-efficient assets, utilizing tax-advantaged accounts, or structuring income-generating activities in a way that qualifies as earned income rather than unearned income. However, it is crucial to consult with a tax professional to ensure compliance with tax laws and maximize the effectiveness of these strategies.