Calculating The Kiddie Tax
Originally applicable to children under age 14 (hence the name), today’s “kiddie tax” governs the calculation of taxes on investment income for dependent children. The law is intended to prevent parents from sheltering income in their child’s name and paying tax at the child’s lower tax rate. The law applies only to investment or “unearned” income, not wages, so what you child earns babysitting or working part-time is still taxed at his or her rate.
For the purposes of calculating tax in unearned income, the IRS considers your offspring to be a “child” if he or she is:
- 18 years old or younger
- 18 years old with earned income equal to or less than half of his or her total support in 2015
- Older than 18 and younger than 24, a full-time student and during 2015 had earned income that was equal to or less than half of his or her total support.
There is no income tax on the first $1,050 of a child’s investment income. The next $1,050 is taxed at the child’s rate. Any investment income over that $2,100 threshold is taxed at the parents’ top marginal tax rate, not the usual capital gains rate.
If the child’s income is less than $10,500 and strictly from investments, parents can choose to report the child’s income separately on the child’s own return or to report the child’s investment income on the parent’s return. This may, however, trigger the loss of tax deductions and credits that are phased out as income increases.
One last caveat about the kiddie tax: The IRS uses slightly different dates for calculating a child’s age under the kiddie tax. Children born on Jan. 1 get counted into the previous year, so a child born on Jan. 1, 1998 will be considered 18 at the end of 2015. Children born Jan. 1, 1997, will be considered 19 and those born Jan. 1, 1992, will be considered 24.
Certain filing requirements apply depending on the parents’ filing status. Please consult your tax professional or the IRS website, www.irs.gov.
Securities offered through Securities America, Inc. Member FINRA/SIPC. Jose R. Rodriguez, Financial Consultant. Advisory Services offered through Securities America Advisors, Inc. An SEC Registered Investment Advisor, Jose R. Rodriguez, Investment Advisor Representative. Rodriguez Financial Strategies LLC and the Securities America companies are unaffiliated. Written by Securities America for distribution by Jose “Rafi” Rodriguez, Retirement Income Certified Professional®. Securities America and its advisors do not provide tax advice. Please consult with your tax professional regarding your individual tax situation. SAI# 1097843.2