If a child is under the age of 19, or, if a full-time student, under the age of 24 and has unearned income, then the "Kiddie Tax" is applicable to said unearned income. Examples of unearned income includes, but is not limited to, dividends and interest.
The "Kiddie Tax" was first introduced in the Tax Reform Act of 1986 to close a loophole through which wealthy parents would transfer assets that produced investment income to their children, so that the income could be taxed at the child's lower tax rate.
Under the TCJA of 2017, the child's standard deduction and the Kiddie Tax threshold still remain at $1,050, respectively, so the child would pay no tax on unearned income up to $2,100, the same as under the 1986 Act.
For tax years after December 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the tax rates that are applicable to trusts and estates, rather than the parents tax rates. The following chart illustrates the applicable Kiddie Tax rates for tax years after December 31, 2017.
| UNEARNED INCOME SUBJECT TO KIDDIE TAX | TAX RATE |
| Up to $2,550 | 10% |
| $2,551 to $9,150 | 24% |
| $9,151 to $12,500 | 35% |
| Over $12,501 | 37% |
A child with a small amount of unearned income will pay less tax under the new tax rates, than if taxed at the parents' rate, assuming the parents rate exceeds the tax rates listed in the above table.
For example, if the child has net unearned income of $5,000, the child would pay income tax of $843 under the new law. Had the parents included that same $5,000 of unearned income on their tax return in 2018, assuming the parents were paying tax at the highest rate for married individuals, the parents would pay tax of $1,850. So, there is tax savings of nearly $1,000 by having the child report the $5,000 of unearned income on their tax return.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.