The Kiddie Tax pertains to the U.S. tax code provisions that impose tax liability on unearned income received by children under a specific age. This tax regulation ensures that parents cannot shift income to their children to take advantage of lower tax brackets.
Key Details and Calculations
Applicability
The Kiddie Tax applies to:
- Children under the age of 19.
- Full-time students under the age of 24, provided their earned income does not exceed half of their support.
Calculation
In 2010, the threshold for unearned income (e.g., interest, dividends) subject to the Kiddie Tax was $1,900 (subject to indexing for inflation). Any unearned income exceeding this threshold would be taxed at the parent’s highest marginal tax rate.
Types of Unearned Income
Unearned income includes, but is not limited to:
- Interest
- Dividends
- Capital gains
- Rents
- Royalties
- Social security payments
Historical Context
The Kiddie Tax was introduced by the Tax Reform Act of 1986 to deter families from transferring investment income to children in lower tax brackets. The specifics of the tax, including the threshold and applicable rates, have undergone revisions over the years.
Comparison with Similar Taxes
Parent-Child Income Shifting
Before the Kiddie Tax, families could significantly reduce their tax liability through income shifting. This tax provision specifically aims to counter such loopholes.
Alternate Provisions
Other tax codes and rules also aim to prevent tax evasion through income shifting:
- Family Attribution Rules: These prevent parents from dodging taxes by attributing income to businesses owned by their children.
- Constructive Ownership Rules: These specify how income is allocated within family-controlled entities.
FAQs
1. What happens if a child has both earned and unearned income?
The Kiddie Tax only applies to unearned income. Earned income is taxed according to normal individual tax brackets.
2. How has the threshold changed over the years?
The threshold for unearned income subject to the Kiddie Tax is indexed for inflation. For the current year, refer to official IRS guidelines.
3. Are there any exemptions?
Children with no unearned income or unearned income below the threshold are exempt from the Kiddie Tax.
References
- Internal Revenue Service (IRS): Kiddie Tax Overview
- Tax Reform Act of 1986
- Treasury Regulations
Summary
The Kiddie Tax is an important consideration in tax planning, designed to prevent families from leveraging children’s lower tax brackets. By taxing unearned income over a reasonable threshold at the parents’ highest marginal rate, this provision ensures fair and equitable taxation across individual and family units.
