The kiddie tax was added by the Tax Reform Act of 1986 to help prevent wealthy taxpayers from shifting investment assets to children, who generally enjoy lower tax brackets. In its 30-plus years of existence, the kiddie tax has expanded its reach from dependents under the age of 14 to those under the age of 19 and 24, if full-time students. As a result, parents have faced increasingly more complexity when applying these rules.
Since the intention of the kiddie tax is to hinder income shifting, it rightly applies to unearned income only — or income derived purely from investments. For the 2016 tax year, the first $1,050 of the dependent’s unearned income, such as from a custodial savings account, is non-taxable. The second $1,050 of unearned income is taxed at the dependent’s tax rate. Any remaining unearned income in excess of the $2,100 is taxed at the parents’ rate. Exceptions are available for married dependents filing a joint return or dependents with no living parent at year-end.
There are two filing options:
The decision to report on the parents’ tax return as opposed to filing a separate tax return for the dependent will vary based on taxpayer-specific circumstances. Below are a few considerations to keep in mind when weighing the pros and cons:
Which is right for you and your family? That will depend on your specific facts and circumstances, but given the complexity of the kiddie tax, consult your tax team to determine the right strategy.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.
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