The Kiddie Tax rules were first enacted as part of the Tax Reform Act of 1986 to prevent wealthy parents from shifting their investment income to their children, who are taxed at a lower rate. The Kiddie Tax applies to all children under 18 and to students up to the age of 24.
The Kiddie Tax only applies if the following four factors are met:
- the child is required to file a return for the year;
- the child has at least one parent alive at the close of the taxable year;
- the child will not file a joint return for the taxable year; and
- the child’s investment income exceeded the annual threshold.
If all the four factors are met and the child’s investment income is over the annual threshold which is $2,000 in 2014, the amount over $2,000 is taxed at the parent’s marginal federal income tax rates which currently is 15% to 20% on long-term capital gains and dividends and up to 39.6% on ordinary income. Note that if a child’s investment income below the $2,000 threshold, it is taxed at very favorable rates typically 0% on long-term capital gains and dividends, and only 10% or 15% on ordinary income. For the year the child turns age 24 and for all subsequent years, the Kiddie Tax no longer applies.
The child must file IRS form 8615 with their 1040 to report investment income over the $2,000. However, parents can save their child from filing a federal tax return by reporting the child’s investment income on the parents’ return using IRS Form 8814. However this is only an option if a child’s earnings are only from interest and dividends, including capital gain distributions, and are less than $10,000.
If you have any questions about the Kiddie Tax or filing your federal income tax return please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.