Kiddie Tax: Gift for the Kids or for the IRS?

The holidays are now behind us, but if you’re planning on giving a financial gift to one of your children, be aware that it may be taxed at your rates, not theirs. That’s because of a “kiddie tax” that creates an extra levy on unearned investment income received by children and certain full-time students under 24 years old.

Why is there a Kiddie Tax?

Without a tax on children’s unearned income, parents would be able to simply park assets in their children’s names and enjoy tax-free investment income. With the kiddie tax, all dividends, capital gains, interest, and financial gifts in excess of $2,100 count as “unearned” income and will be taxed at the parents’ top rate. For example, if the parent’s income from dividends are taxed at 25%, the child’s will be as well.

Changes to the Kiddie Tax

In its original iteration in 1986, the kiddie tax only applied to children under the age of 14. Eventually the age was increased to 18, and now it includes full-time students up to the age of 24 whose parents claim them as dependents. The threshold amount has also changed over the years. The threshold for 2015 is $2,100, though it may go up or down in future years.

Specifics

It’s important to remember that the kiddie tax does not affect a child or dependent’s earned income (money made from wages, for example). Also, if the child provides half of his or her own financial support, the kiddie tax may not apply to their investment income above the threshold. Most young investors won’t come close to the $2,100 kiddie tax threshold. It would take an investment of roughly $100,000 in the S&P 500 or a 10-year Treasury security to earn over that much in a year.

Tax Law and Preparation with Cohen & Burnett

The team of tax experts and attorneys at Cohen & Burnett has provided tax preparation, estate planning, and legal services to the Washington, D.C. metro area for over 25 years. We specialize in tackling complex estate planning and administrative issues. For more information on our capabilities, or to discuss the approaching tax season, please visit our homepage or contact us directly.

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