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What income counts for the kiddie tax?

As parents, we all want the best for our children. We want to make sure that their financial future is secure and that their income is protected. But, what counts as income when it comes to the Kiddie Tax?

The Kiddie Tax is a tax imposed on the unearned income of dependent children. It is designed to prevent parents from shifting their income to their children in order to take advantage of lower tax rates. At Creative Advising, certified public accountants, tax strategists, and professional bookkeepers, we understand the importance of understanding the Kiddie Tax and what income counts for the Kiddie Tax.

In this article, we will provide an overview of what income counts for the Kiddie Tax. We will cover the different types of income that are taxable, the tax rate that applies to the Kiddie Tax, and the exemptions that may be available. We will also provide some tips to help you understand and prepare for the Kiddie Tax.

By the end of this article, you will have a better understanding of the Kiddie Tax and how it applies to your child’s income. You will also have the information you need to make sure your child’s income is properly taxed and protected.

So, let’s get started.

Who is subject to the Kiddie Tax?

The Kiddie Tax is a taxation concept that applies to unearned income of children under the age of 19, or under the age of 24 if the child is a full-time student. The income of a child is taxed at the parents’ tax rate if the child’s earnings are above a certain threshold. Taxable income is the same as it is for an adult and includes wages, dividends, interest, etc. A child can also be subject to the Kiddie Tax in the event that they file a separate return.

At Creative Advising, we believe it is important to advise all of our clients, including young adults, on tax filing and reporting requirements. By staying up-to-date with tax law changes, such as the creation of the Kiddie Tax, we help ensure that our clients are taking advantage of the right business and tax strategies to minimize their overall tax burden. We understand how complicated the Kiddie Tax can be, so our team is equipped to help guide you through the process.

What income counts for the Kiddie Tax? Unearned income is the most common type of income taxed under the Kiddie Tax, and includes items such as stock dividends, interest, capital gains from the sale of stocks and bonds, trust distributions, pensions, annuities, or alimony. If the child’s parents claim them as a dependent on their tax return they are subject to the Kiddie Tax.

What income is taxable under the Kiddie Tax?

The Kiddie Tax applies to the investment income of dependent children under the age of 24. The investment income includes any interest, dividends, domestic capital gains, mutual funds, rental income, royalties, taxable social security benefits, and/or other unearned income sources. In general, any income received from these sources is taxed at the parents’ marginal tax rates, typically resulting in the highest rate of taxation.

In 2021, the first $1,100 of a qualifying child’s unearned income is tax-free, and the next $1,100 is taxed at the child’s own rate. Any income over the $2,200 threshold is subject to the Kiddie Tax. The Kiddie Tax rate is determined by the parents’ marginal tax rate, up to the 37% bracket. For example, if the parents file separate returns or if the parents’ income is spread across multiple causes of income, their highest marginal tax rate might be lower than the 37% bracket. This would reduce the kid’s Kiddie Tax rate.

It is important to note that any earned income, such as income from a job or self-employment, is not subject to the Kiddie Tax and is instead taxed at the child’s own income tax rate. Furthermore, any capital gains earned from the sale of stocks or mutual funds owned for less than one year is taxed at the child’s own capital gain rates.

How is the Kiddie Tax calculated?

The Kiddie Tax is basically a tax on unearned income that works in two steps:

First, in computing the Kiddie Tax, a minor’s net unearned income is subject to the rates applicable to trusts and estates. These rates refer to the Internal Revenue Service’s “Trusts and Estates” income tax rate schedule. The amount of tax thus computed is also called the “tentative tax.”

Second, the “tentative tax” is compared to the tax liability that would be imposed if the minor’s net unearned income were reported on the parents’ tax return and taxed according to the parents’ marginal tax rate. The lesser of the two taxes is the tax the minor is liable for, and is called the “Kiddie Tax.”

What income counts for the kiddie tax? Unearned income such as dividends, interest, capital gains, rental income, royalties, and passive income all count for the kiddie tax, while earned income, such as wages from a job, does not. This means that income from investments or from inheritance is taxed at higher rates to discourage parents from helping their children avoid or reduce the taxes they would have due if their earnings were reported on the parents’ return.

What are the exceptions to the Kiddie Tax?

The Kiddie Tax applies to most unearned income, or income not earned from employment or business activities, of children under the age of 19 or those under the age of 24 and attending college full-time. However, there are a few specific exceptions to this rule. Unearned income eligible for exclusion includes “earned income,” such as wages, salaries, or tips, as well as dependent-care benefits or reimbursements.

In addition, amounts received as disability income and as a result of a personal injury are not subject to the Kiddie Tax. Furthermore, any income resulting from property that is used directly in a child’s trade or business, such as interest earned on a loan used for a business activity, does not count towards the Kiddie Tax. Finally, amounts excluded from income for tax purposes, such as scholarships, certain gift and inheritance income, and tax-exempt interest, are all excluded from the Kiddie Tax.

What income counts for the kiddie Tax? Unearned income gained by a child which is not specifically excluded by one of the exceptions listed above are subject to the Kiddie Tax and should be reported and taxed through the child’s tax return. This includes, but is not limited to, interest and dividends, gains from sales or exchanges of capital assets, as well as income from trusts, estates, and annuities. Any income received by a minor child must be reported and taxed appropriately. As your tax strategist, I can help ensure that you are making informed choices when it comes to your minor child’s taxes.

How does the Kiddie Tax affect the parent’s tax return?

The Kiddie Tax applies to taxable investments of a dependent child, under 18 years of age, with unearned income exceeding a certain amount. The parent’s income tax return must include the child’s income and the associated Kiddie Tax due. The parent must file a separate tax return for their dependent child, Form 8615, and calculate the Kiddie Tax due. This amount is then reported on the parent’s personal tax return in the appropriate section on their Form 1040.

The Kiddie Tax can affect the parent’s return in several ways. First, the addition of the child’s income means that the parent could be bumped up into a higher tax bracket, resulting in additional taxes. Second, the Kiddie Tax due must be paid with the parent’s personal return. If the parent does not have enough available income to cover the annual tax bill, a payment plan should be considered. Finally, depending on the parent’s income or filing status, they may be required to file an additional tax return to report the child’s income and calculate the Kiddie Tax due.

What income counts for the kiddie tax? Income from investments such as interest, dividends, capital gains, and certain trusts may be subject to the Kiddie Tax. This applies to any income produced by the investment, including capital gains from the sale of investments. Additionally, specific parts of income taxes paid to foreign countries may also be subject to the Kiddie Tax. In some cases, regular wages and salaries may be subject to the Kiddie Tax, if the child meets certain criteria.

“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
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Please consult with a qualified tax professional or relevant authorities for specific advice tailored to your individual circumstances and to ensure compliance with the most current tax laws and regulations in your jurisdiction.”