tharke420><>< Taxes from A to Z: K Is For Kiddie Tax

Taxes from A to Z: K Is For Kiddie Tax

 

It’s no secret that Congress is concerned about tax fraud. With loopholes and exceptions galore (all, ahem, actually created by Congress), Congress believes that taxpayers are trying to evade taxes left and right. And who among these thieving schemers are the worst offenders? These folks:

That’s right, kids.
In 1986, Congress was so concerned about kids cheating the system (okay, really, kids and their parents), that they enacted the so-called “kiddie tax.” The idea behind the kiddie tax was that by taxing a child’s passive income (from, say, investments) at the same rate as that of their parents, there would be little to no incentive to shift income.
I’m not so sure the plan to strip motivation from shifting income worked. What did happen, however, is that parents all over the country have scrambled since to figure out the kiddie tax. The rules can be tricky and depend on a number of factors, including the age of the children, as well as the amount and source of the income.
The general rule for children and other dependents is that if income is earned and it is less than $5,700, there’s no need for that child to file a federal income tax return. Earned income is income made from wages, salary or self-employment (a quick caution, though, that if a taxpayer is subject to SE tax, the threshold is generally $400 of net earnings); tips are also considered earned income.
Even if your child doesn’t have to file his or her own federal income tax return, he or she may want to file if federal income tax was withheld from his or her check. This doesn’t usually happen for odd gigs like babysitting but withholding might have been required at a “real” job that draws a regular paycheck. Your child might also want to file if he or she qualifies for certain credits which would result in a refund; remember that earned income is taxable at the child’s own rate.
The rules are different when income is unearned, which generally means income from dividends and interest. For children under the age of 18, or under the age of 23 while a full time student, the first $950 is considered tax-free and the next $950 is taxed at the child’s rate. Unearned income over $1,900 is taxed at the child’s parents’ tax rate. Income which is taxed at the child’s parents’ tax rate does not necessarily mean that the income has to be included on the parents’ tax return; the child can opt to file a separate return (and in fact, that can sometimes be preferable for all kinds of reasons, including the dreaded AMT).
That, of course, assumes that everything is easy. Sometimes, arrangements aren’t so clear cut. In the event that the child’s parents are divorced, generally, the kiddie tax is reported on the custodial parent’s tax return. In the event that the child’s parents are unmarried – and have never been married to each other – or if the child’s parents are married but filing separate, the kiddie tax is calculated using the parent’s return with the highest taxable income.
Keep in mind that these rules apply to children who are dependents. Those who are not dependents because of their age or filing status (such as children who are married), level of support or those who are emancipated have a different set of rules. For example, children whose earned income is more than half the cost of their support are not subject to the kiddie tax rules – that means that Willow Smith can breathe a sigh relief.