The Kiddie Tax Calculator helps parents and guardians estimate the portion of a child’s unearned income that may be taxed at the parents’ marginal tax rate, rather than the child’s typically lower rate.
Kiddie Tax Calculator
Kiddie Tax Formula:
1. Taxable Unearned Income (TUI) = Unearned Income – Standard Deduction ($1,300)
2. Kiddie Taxable Income (KTI) = TUI – Child’s Rate Buffer ($1,300)
3. **Kiddie Tax Liability** = KTI × Parents’ Marginal Tax Rate (if KTI > 0)
Variables:
- Child’s Total Unearned Income: Income from investments, interest, dividends, and capital gains.
- Parents’ Adjusted Gross Income (AGI): Used to determine the parents’ marginal tax bracket, which is applied to the child’s income exceeding the threshold.
- Child’s Age: Used to confirm eligibility for the Kiddie Tax rules (generally under 18 or 19-24 if a student).
What is Kiddie Tax?
The Kiddie Tax is a provision in the U.S. tax code designed to prevent parents from shifting investment income to their children to avoid paying higher taxes themselves. Before the Kiddie Tax, parents could put assets in their child’s name, having the income taxed at the child’s lower rate.
Under current law, if a child’s unearned income exceeds a certain threshold (historically around $2,600, covering the standard deduction and the child’s tax buffer), the excess amount is taxed at the parents’ marginal income tax rate. This mechanism ensures that the income tax burden is not significantly reduced by transferring assets to dependents.
How to Calculate Kiddie Tax (Example):
- Determine Unearned Income: Assume a child has $8,000 in dividend income (Unearned Income).
- Subtract Standard Deduction: $8,000 – $1,300 (Standard Deduction) = $6,700 (Taxable Unearned Income).
- Determine Kiddie Taxable Income (KTI): Subtract the portion taxed at the child’s rate (Buffer). $6,700 – $1,300 (Child’s Rate Buffer) = $5,400 (KTI).
- Determine Parent’s Rate: Assume the parents’ AGI puts them in the 24% tax bracket.
- Calculate Kiddie Tax Liability: $5,400 (KTI) × 24% (Parent’s Rate) = $1,296. The $1,296 is the additional tax liability due to the Kiddie Tax rules.
Frequently Asked Questions (FAQ):
Is the Kiddie Tax only for children under 18?
Generally, it applies to children under 18 at the end of the tax year. However, it can also apply to 18-year-olds if their earned income did not exceed half of their support, and to full-time students aged 19 to 24 whose earned income did not exceed half of their support.
What is considered ‘unearned income’ for the Kiddie Tax?
Unearned income includes investment income such as interest, dividends, capital gains, rents, royalties, and certain taxable scholarships or distributions from trusts.
Do I have to file a separate tax return for my child?
If the child’s only income is unearned income, parents can often elect to include the income on their own tax return (Form 8814). Otherwise, the child must file their own return (Form 8615 is used to calculate the tax).
How often do the Kiddie Tax thresholds change?
The standard deduction and the buffer amount taxed at the child’s rate are adjusted annually for inflation by the IRS. Always use the current year’s figures for accurate filing.