For example, you might own an asset that produces $50,000 in investment income annually. If you fell into the 37% marginal tax bracket, you would have to pay $18,500 or 37% of that money in tax to the IRS if you were to report it on your own tax return. Now, if your child had no other income, their tax bracket for $50,000 may be 22%. Your child would therefore hypothetically pay only $11,000 in taxes (22% of $50,000) if you transferred ownership to them. Your family would save $7,500 of that investment income—the difference between the $18,500 you would owe and the $11,000 your child would owe. In reality, the kiddie tax prevents such moves. It requires that the income be taxed at your bracket regardless of whether your child owns the assets.
How the Kiddie Tax Works
The kiddie tax applies to a minor’s unearned income over $2,300 for tax year 2022. (The limit is $2,500 in 2023.) The child’s age factors in as well. The kiddie tax only applies if your child was 18 or under, or was a full-time student aged 19 to 24 whose earned income for the year was not more than half what you paid for their support. At least one parent must be living as of the last day of the tax year, the child must be required to file a tax return, and they can’t file a joint return with a spouse if they happen to be married. The child does not have to be claimed as your dependent on your taxes. They can be your biological child, adopted, or a stepchild. Here’s how a child’s unearned income is taxed:
The first $1,150: not taxed because of the standard $1,150 deductionThe next $1,150 (of a total of $2,300): taxed at the child’s marginal tax rateUnearned income over $2,300: taxed at the parent’s marginal tax rate.
The rules change and become much more complicated if your child also has earned income from a job. You might want to consult with a tax professional if this is the case.
Requirements for the Kiddie Tax
Your child must file a tax return if the kiddie tax applies to them, and they must additionally complete and submit IRS Form 8615 with the return. Your child also must be younger than 19 at the end of the tax year if you want to report their unearned income on your tax form, and they can’t have made any estimated tax payments or have carried over a refund from a previous year to apply to the current year. Their income was not subject to backup withholding.
How Much Is the Kiddie Tax?
The kiddie tax rate uses parents’ marginal tax rate or the rate they pay on their top dollars of income, so any additional income would fall into this bracket until it reaches the next highest tax bracket. The 2022 tax brackets range from 10% to 37%. Your child’s unearned income might additionally be subject to the net investment income tax at a rate of 3.8% of their investment income, or 3.8% of the amount that their modified adjusted gross income exceeds a threshold set by their filing status. The kiddie tax was even more formidable in tax years 2018 and 2019 before the Tax Cuts and Jobs Act’s provision for it was repealed. You can file an amended tax return, Form 1040X, in 2021 for one or both of those years if you paid the kiddie tax at the higher TCJA rates. Substitute your own marginal tax rate for the estate and trust tax rate. This could even potentially result in a tax refund.
