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Understanding Kiddie Tax: What It Means for Your Child's Income
Definition & Meaning
The kiddie tax is a federal tax that applies to the unearned income of children. Specifically, it affects children under the age of 18 whose unearned income exceeds a certain threshold. If the parents' tax rate is higher than the child's, the child's unearned income is taxed at the parents' rate. This tax is designed to prevent parents from shifting income to their children to take advantage of lower tax rates. Unearned income includes sources such as dividends from stocks and mutual funds, as well as interest payments, but does not include income earned from employment.
Table of content
Legal Use & context
The kiddie tax is primarily relevant in the context of federal income tax law. It is used to determine how unearned income for minors is taxed, which can be significant for families with investments. Understanding this tax is crucial for tax planning and compliance. Users can manage their tax obligations by utilizing legal templates from US Legal Forms, which can help in filing accurate tax returns and understanding the implications of the kiddie tax.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A child aged 15 has $3,000 in unearned income from dividends. If the parents' tax rate is 25%, the child will be taxed at that rate instead of their lower rate.
Example 2: A child aged 17 receives $2,500 in interest payments. Since this amount is below the threshold for the kiddie tax, it is taxed at the child's lower rate (hypothetical example).
Relevant laws & statutes
The kiddie tax is governed by the Internal Revenue Code, specifically under Section 1(g). This section outlines the rules regarding the taxation of unearned income for minors and the applicable thresholds and rates.
Common misunderstandings
What to do if this term applies to you
If you believe the kiddie tax applies to your child's unearned income, consider the following steps:
Review your child's unearned income sources to determine if they exceed the threshold.
Consult the IRS guidelines to understand how the kiddie tax may affect your family's tax situation.
Utilize US Legal Forms to find templates for tax forms that can help you file accurately.
If your situation is complex, consider seeking advice from a tax professional.
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