What is the Kiddie Tax?

Posted by Madison on February 18, 2015

We recently discussed Do Your Kids Need to File Taxes? I mentioned that if interest, dividends and other investment income are more than $2,100 in 2016, you’re going to get hit with the kiddie tax.

What is the kiddie tax and who does the kiddie tax apply to? Let’s take a closer look.

Background

Children typically pay a lower tax rate than adults because their income is lower. However, wealthy parents used this as an opportunity to shift investment income to their children to avoid tax or pay lower taxes. Once Congress realized what was happening they created the kiddie tax.

What is the Kiddie Tax?

The kiddie tax applies to interest, dividends and investment income. If your child’s investment income is higher than the threshold part of their income will be taxed using your tax rate, not your child’s tax rate.

The kiddie tax only applies to investment income, not income from a part time job or self employment.

Who Does the Kiddie Tax Apply To?

Kiddie Tax Age Limits. The kiddie tax applies to children under age 19. In addition, it also applies to dependents age 19-23 who are full time students.

Kiddie Tax Income Limits. The kiddie tax limit for 2016 is $2,100. This limit includes your child’s interest plus dividends plus other investment income. If the total is over $2,100 the kiddie tax will apply.

How to File Taxes with the Kiddie Tax

When you file your child’s tax return you will attach Form 8615 to report the kiddie tax. Or, if you meet the requirements you may be able to attach the child’s return using Form 8814 depending on your filing status.

If you are eligible to file either way you should run the tax returns both ways to determine which will amount to the least amount of total tax.

I use TurboTax to run the scenarios and file each tax return for my children. And yes, you must file a separate return for each child!

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