Kiddie Tax Changes: What You Need to Know
The Tax Reform Act of 1986 first brought about the concept of taxation on the investment and unearned income for those individuals over thirteen and under seventeen years of age. It is commonly known as the “Kiddie Tax.” Originally the law only covered children over fourteen, as children under that age cannot legally work. This meant that any income of a child under fourteen was derived from dividends or interest from bonds. More recently, the age limits were revised to include children who hadn’t reached age nineteen by the close of the tax year, and full-time students under age twenty-four whose earned income was less than half of their own support, had at least one living parent, and didn’t file a joint return. In the original tax bill, this tax is imposed on children whose investment and unearned income was higher than the annual threshold. Under the old law, the first $1,050 of a child’s income is tax-free and the next $1,050 is taxed at 10%. Furthermore, any unearned income over the $2,100 was taxed at the parents’ rate if it was higher than that of the child. Earned income, like wages from a job, were still taxed at the child’s lesser rate. In other words, the earned income from a job and the unearned investment income up to $2,100, less the standard deduction, was taxed at the child’s rate. This encouraged parents and grandparents to make financial gifts to minors in the form of appreciated stock, assets from taxable estates, income transfers, and inherited IRAs.