Kiddie tax

What is the kiddie tax?

To discourage shifting income to lower-bracket children, the taxpayer-child’s unearned income can be taxed at the less-advantageous trust rates. The tax is computed on Form 8615 Tax for Certain Children Who Have Unearned Income and shown on Form 1040, line 44.

To whom does the kiddie tax apply?

The kiddie tax can apply until the year that a child turns age 24; but only when all four of the following requirements are met for the tax year:

  1. The child doesn’t file a joint return for the year.
  2. One or both of the child’s parents are alive at the end of the year.
  3. The child’s net unearned income for the year exceeds the floor amount for that year, and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction. If the unearned income floor isn’t exceeded, the kiddie tax doesn’t apply. If the floor amount is exceeded, the unearned income in excess of the floor amount is subject to the kiddie tax.
  4. The child falls under one of the following age-related rules:
    1. Rule 1. The child is 17 or younger at year end.
    2. Rule 2. The child is 18 at year end and doesn’t have earned income that exceeds half of his or her support. (Support costs don’t include education expenses paid with tax-free scholarships.)
    3. Rule 3. The child is age 19 to 23 at year end and 1) is a student, and 2) doesn’t have earned income that exceeds half of his or her support. A child is considered to be a student if he or she attends school full-time for at least five months during the year. (Again, support costs don’t include education expenses paid with tax-free scholarships..)

Refer to the Children’s Unearned Income section in Publication 17 for more guidance.

What income is earned and what income is unearned?

The Earned Income Table in the Volunteer Resource Guide (Earned Income Credit tab) can be used to determine whether the most common seen items of income are earned or unearned.

A special note about taxable scholarships or grants:

For purposes of determining the child’s filing requirement (gross income test) and the amount of standard deduction to which the child is entitled, taxable scholarships or grants are earned income. Refer to the filing threshold chart For Children and Other Dependents in the Volunteer Resource Guide, Who Must File tab.

Once the child meets the filing requirement threshold, the taxpayer-child’s taxable scholarship or grant is unearned income for the kiddie tax.

How is the taxpayer-child taxed?

There is a floor amount of unearned income that is not subject to the kiddie tax. Refer to the Volunteer Resource Guide for this annually-set floor amount. Unearned income above that floor, or the child’s taxable income if it is less, is taxed at the trust rates.

When the taxpayer-child’s taxable income is more than the excess of their unearned income over the floor amount, the balance of their taxable income is taxed in the normal way using the tax tables or tax rate schedule. In other words, the taxable earned income and unearned income below the floor amount is taxed at the normal individual rates.

Example:

  • Terry, age 19, is a dependent of his parents.
  • He has a part-time summer job and earns $7,500, which is less than half of his total cost of support.
  • He also declares that $4,000 of his scholarship/grant is taxable and he has $750 of interest income.
  • His total gross income is $12,250 ($7,500 + $4,000 + $750).
  • Terry’s income is above the filing threshold and Terri must file a return.
  • His standard deduction will be his earned income plus $350, not to exceed $12,000 (see the Standard Deduction Worksheet in the Volunteer Resource Guide, Deductions tab). For this purpose, the taxable scholarship is earned income so his standard deduction is $11,850 ($7,500 + $4,000 + $350).
  • Terry has taxable income of $400 ($12,250 less $11,850).
  • In completing Form 8615, Terry will show $4,750 of unearned income (the scholarship plus the interest).
  • The $4,750 is more than his taxable income ($400) and more than $400 over the floor amount.
  • Because his taxable income is less than his unearned income in excess of the floor amount, the full taxable income of $400 will be taxed at the higher trust rates.