"Kiddie" Tax or How Children Are Taxed
Children are subject to income taxes just like their parents. However,
there are some special rules that apply, and some of them can get complicated.
This article provides some general information, but you may want to consult
your tax advisor to better understand how your children are being taxed.
The General Rule
Generally, children are treated as separate taxpayers and their income
is taxed at the same marginal rates as their parents. The tax table used
to calculate their tax is the single filer table. The lowest rate is 10%
and the rates rise to 39.6% (for 2017) for the highest levels of income.
Rules for 2017
These rules will apply to children under the age of 18, 18 year olds with
earned income less than half of their support, and 19 to 23 year old students
with earned income less than half of their support
If a child has a job,
their earned income is taxed regularly. In fact for 2017, the first $6,300
is usually tax free (by taking advantage of the standard deduction). Then
income is taxed at the child's marginal bracket, usually 10%. Even if
the child has less than $6,300 of earned income, a tax return may still
be necessary to get a refund of any taxes that were withheld at their
If the child has unearned
income from interest, dividends or capital gains, the rules get a bit
more difficult. If the child meets any of the three criteria described
above, the first $1,050 of unearned income is not taxed and the next $1,050
is taxed at the child's tax rate. All the unearned income above $2,100
is taxed to the child, but at the parent's tax rates.
known as the Kiddie Tax, was enacted to prevent families from shifting
large amounts of investment income to children to avoid having it taxed
at the parent's higher rates.
The Really Complicated
The interaction between the Kiddie Tax and the parents' tax situation
can become very complicated if the parents have an unusual tax issue like
the Alternative Minimum Tax or relatively large amounts of capital gains.
In those cases, a qualified tax advisor is a must.