If you or a generous relative established a trust or other interest-bearing account for your minor child, you may encounter some unique headaches come tax time. That’s because the IRS taxes income on those kinds of accounts and it’s the responsibility of the parents or guardians to file the right paperwork and make any required payments. It’s known as the “kiddie tax,” and it changed a lot recently then changed a lot again soon after. If your child is subject to the kiddie tax, it might be time to brush up on the subject.
The kiddie tax was designed with a very specific purpose
Unearned income is income that isn’t gained from employment, like dividends and interest from investments. When children have accounts set up in their names, income from those accounts is subject to the Tax for Certain Children Who Have Unearned Income, which is the proper name for the “kiddie tax.” The law dates to 1986 and was designed to prevent parents from sheltering assets in their children’s names so they could pay taxes on those assets at the lower child’s tax rate. The law achieved this by taxing a child’s unearned income over a certain threshold at whatever rate the child’s parents paid.
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The kiddie tax has had a busy few years
In 2017, President Trump’s signature Tax Cuts and Jobs Act (TCJA) changed that long-standing policy. It mandated that instead of children’s unearned income being taxed at whatever rate their parents paid, it would be taxed at a much higher rate previously reserved for trusts and estates.
Then in 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act repealed those changes. Starting with tax year 2020 (the one you’re filing for this year), it goes back to the way it was and the kiddie tax will be structured as follows:
No tax on the first $1,100
The next $1,100 is taxed at the special child’s rate
Anything over $2,200 is taxed at the rate the child’s parents pay
IRS Form 8615 is the go-to document for calculating and filing for the kiddie tax. Form 8615 must be filed if a child:
Has more than $2,200 in investment income
Is required to file a tax return
Is under 18 or meets the requirements for being 18 or older
Has at least one living parent
Doesn’t file a joint return with a spouse
If you must file Form 8615, you might get hit with the Net Investment Income Tax, a 3.8 percent tax on either your modified adjusted gross income or your net investment income–whichever is less.
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Can’t you just include your kid’s income on your own return? Maybe
In some cases, parents might be able to report their child’s ordinary dividends, interest, and capital gains distributions on their own tax returns. If the parent is eligible and chooses this option, the child won’t have to file Form 8615 and the parent would instead use Form 8814 to file this way–but there is a tradeoff for the simplicity. Parents who opt for this choice might pay a higher rate than they would have on their child’s unearned income. In order to qualify to combine your child’s unearned income on your own tax return through Form 8814, your child must be under 19 years old, have less than $11,000 in unearned income, and meet all the IRS’ other requirements.
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Last updated: Jan. 20, 2021