What is a Kiddie Tax?

The Kiddie Tax is a special tax law that was created in 1986, it was created to address investment tax and unearned income tax for people less than 17 years. In the United States, the kiddie tax rule is contained in the Internal Revenue Code 1. It is a tax rule applicable for individuals who are below 17 years.

How Does a Kiddie Tax Work? 

Individuals who are below 17 years and have their investment and unearned income higher than the annual threshold set by the IRS are subjected to kiddie tax. The kiddie tax rule charge individuals taxes on certain unearned income at the marginal rate of the guardian or parent. As adjusted by the Tax Cuts and Jobs Act of 2017, the kiddie tax rule no longer use the rate of the child's guardian to determine the tax on the child's income. Rather, the tax rate is determined by the amount the individual earns using a special taxation structure. In the United States, the kiddie tax rule was developed to eliminate the prevention of taxes by parents who collect large gifts of stock or unearned income in their kids names. The kiddie tax rule allows taxes to be imposed on any income earned by individuals less than 17 years which is higher than the threshold set by the IRS.

Who and What the Kiddie Tax Applies to:

Before 2018, the kiddie tax rule only applies to individuals below 17 years, however, as of 2018, the kiddie tax rule is applicable to individuals who are 19 years and below. The kiddie tax is imposed on gifts, mutual funds, stocks, bonds, inheritances and real estate that children under the age of 19 receive. Children or individuals who earn salaries or wages are not affected by the kiddie tax rule. The kiddie tax also applies to investment and unearned income by dependent individuals who are full-time students and between the ages of 19 and 23.

History of the Kiddie Tax Law

Initially, the kiddie tax rule applies to investment and unearned income by children under 14 years. Due to the fact that the children are unable to take up jobs, they generate income through gifts, dividends and interest from bonds. When the government discovered that individuals use this tax provision to evade taxes, the age was changed from 14 to 16 and 18 years. Also, as at 2017, $1,050 was set as the threshold for kiddie tax, this amount was taxed at the child's tax rate while income above $2,100 was taxed at the guardian's income rate. Certain amendments were made to the kiddie tax in 2018, this was brought by the Tax Cuts and Jobs Act.