Understanding the Kiddie Tax

• The kiddie tax limits how much unearned income a dependent can have in a year without a taxable event.
• The kiddie tax gets progressively larger depending on the unearned income total.
• You may not have to file unearned income for your dependent if they match certain criteria.

The kiddie tax was created in 1986 in an attempt to prevent parents from avoiding federal income tax by gifting stock to their children (or dependents). This law applies to children up to 18 years of age or dependents who are full-time students from age 19 to 24. Under the kiddie tax, any unearned income the child receives has to be below $1,150 to avoid paying the same marginal income tax rate as their parents. 

It’s important for parents to understand what implications the kiddie tax has on their gifting and stock transfer plans. Knowing whom the kiddie tax applies to, as well as current tax rules, can further assist you with your wealth management strategy surrounding tax deductions and your overall gifting strategy. 

What is the kiddie tax?

The kiddie tax is a tax on a child’s unearned income. The Tax Reform Act of 1986 instituted this law, which reduces the incentive for people to shift their income to their children, thereby lowering their own taxable income.

Children may need to file IRS Form 8615 to declare their unearned income for the year. The kiddie tax doesn’t apply to everyone in every scenario. Whether or not you have to file depends on a few circumstances. If your child falls into the following categories, they'll have to report their unearned income.

• Are currently required to file a tax return
• Do not have to file a joint tax return for 2021
• Made more than $2,200 in unearned income
• Has at least one parent who was alive by the end of 2021
• Was under the age of 18 by the end of 2021 or was a full-time student between the ages of 19 and 24 at the end of 2021 and did not have earned income exceeding half of the child’s support

You do not have to file a Form 8615 on your child’s behalf if their unearned income was below $1,100 in 2021. You can file your dependent’s unearned income on your own taxes instead. If your child satisfies all of the criteria above, your child may be subject to the net investment income tax, which is a 3.8% tax on either net investment income or the excess total of the child’s modified adjusted gross income, whichever is lower. 

How much is the kiddie tax?

Different levels of unearned income create different child tax rates. Unearned or investment income of $1,150 or less qualifies for the kiddie tax standard deduction during the 2022 tax year. From there, however, the tax brackets change based on the amount of income made during the year. The amount of tax levied on unearned or investment income for dependent children varies depending on how much they’ve made.

Kiddie tax brackets

The qualifications for the standard deduction of a child’s unearned income, as well as the child’s tax rate for unearned income, changed between 2021 and 2022. The 2022 tax brackets for unearned child income are presented below. 

Bear in mind that these figures are subject to change, and that other tax laws might apply to you based on your finances. Reach out to your First Republic Private Wealth Manager for specific advice pertaining to your financial household.

Who the kiddie tax applies to

The kiddie tax doesn’t apply to everyone in every scenario. Whether or not you have to file depends on a few circumstances. If your child is required to file a tax return for the tax year, or does not file a joint return for the tax year, they will need to report their unearned income:

• The child is required to file a tax return for the tax year.
• The child’s unearned income for the tax year was more than the tax year’s threshold.
• The child, age 18 at the end of the tax year, provided more than half of their own support through earned income.

You may not have to report your child’s unearned income if: 

• The child files a joint return for the tax year.
• The child is under the age of 18 at the end of the tax year.
• The child is a full-time student aged 19 to 23 who didn’t earn more than half of their support in the year.

Examples of unearned income

A variety of unearned income types are subject to kiddie tax rules. These include:

• Capital gains
• Inheritance money
• Taxable scholarships
• Unemployment payments
• Investment interest and dividends
• Taxable fellowships or grants not reported via W-2 statements

If the kiddie tax applies to your dependent, you should also consider other rules and regulations related to your filing. Financial professionals can help offer tailored advice for your specific needs and situation.

The bottom line

The kiddie tax was created to close a loophole by which parents and guardians could offset their own taxable income by distributing it to their child or dependent. As long as your child’s unearned income is below $1,500 per year, you can qualify for a standard deduction. 

If your child has made more than this in unearned income, however, you may have to file a return for them or include the appropriate information in your own return. Financial experts can help you better understand current tax law, upcoming changes and your individual needs.