Scenario: I’m a wealthy person and I want to avoid paying some tax. Ooo! I know what! I’ll give some of my investments to my kids – they don’t have much income, so the interest, dividends, and capital gains on those investments will be taxed at a lower rate. Great plan!
Not so fast.
Congress was on to you a long time ago buddy. There are rules about that – colloquially know as the “Kiddie Tax rules,” officially known as Sec 1(g) of the Internal Revenue Code. No matter what you call it, the rule is the rule: your child’s unearned income above $1,900 must be taxed at your rate (if your rate higher than your kid’s rate).
Of course, like any rule in the tax world, there are details. The kid whose income is subject to Kiddie Tax must be:
Under age 18
Age 18, whether or not a student, and his/her earned income doesn’t exceed half of his/her support
Age 19 – 23 and a student, and his/her earned income doesn’t exceed half of his/her support.
Also, at least one of the parents must be alive at the end of the year, and the child must not have filed their own joint return for that year.
Hmmm... you can see some loopholes in these rules, but they aren’t very enticing – yanking your child out of school at age 19, double parental suicide, or a shotgun wedding – probably not worth it just to avoid paying some taxes!
What if the: Figure the Kiddie tax on the:
parents file separately? parent with the greater taxable income.
parents aren’t married? custodial parent.
parents live together but were never married? parent with greater taxable income.
kid is a foster child? foster parents’ income
there is a step-parent filing jointly? joint income of the parent & step-parent
there is a step-parent filing separately? parent or step-parent with greater taxable income
Generally, a child with income must file their own tax return, but in some cases you can elect to report the child’s income on your tax return. To make the election, the child must have no earned income and their unearned income cannot exceed $9,500. Also, no tax payments can have been made in the social security number of the child for that year. This election can make filing convenient – one less return to file! But, it does raise the Adjusted Gross Income on your return which can have a lot of ramifications. And, there are a few (somewhat obscure) deductions that can only be taken on the child’s return that would disappear. Oh, and the election is irrevocable – no take-backs.
Kiddie Tax is calculated on Form 8615 and can get complicated if more than one child is in the picture or if Alternative Minimum Tax comes in to play.
Give us a shout at Moseley & Associates LLC if you have any questions about the Kiddie Tax and how it might affect you.