At Scout Tax, we understand that tax season can be overwhelming, especially when navigating complex regulations like the Kiddie Tax. As your trusted tax advisors, we’re here to explain the Kiddie Tax and provide clarity on the rules for the 2024 tax year.
History of the Kiddie Tax
This was first introduced by the Tax Reform Act of 1986. This prevents high-income earners from transferring assets to their children in lower tax brackets to reduce their overall tax liability. Initially, it only applied to children under the age of 14. However, subsequent changes expanded the age range, and today, it applies to certain children under the age of 19, as well as full-time students under the age of 24, whose unearned income exceeds certain thresholds.
Who Does the Kiddie Tax Apply To?
The Kiddie Tax applies to children who meet specific age and income criteria. The tax year 2023, filed in 2024, applies to children under 19 or full-time students under 24 who have unearned income above $2,200.
How to Calculate the Kiddie Tax for Tax Year 2023 (Filed in 2024)
The calculation involves determining the child’s unearned income, which includes interest, dividends, capital gains, and other investment income. Once the unearned income exceeds the threshold of $2,200, the excess is subject to taxation at the parent’s marginal tax rate.
At Scout Tax, we understand that calculations can be complex, especially when considering various sources of income and exemptions. That’s where our team of experts, led by Gil Pocker, an Enrolled Agent (EA), can assist you. With our expertise, we can ensure accurate calculations and minimize your tax liability within the law.
Kiddie Tax Capital Gains
Capital gains earned by children subject to this tax are treated as unearned income and are therefore included in the calculation. This means that any gains realized from the sale of assets, such as stocks or real estate, are subject to taxation under these tax rules if they exceed the $2,200 threshold.
What date is the cutoff for the age under the Kiddie Tax?
For the tax year 2023, filed in 2024, the cutoff for the age under the Kiddie Tax is generally the last day of the year. This means that if the child turns 19 (or 24 for full-time students) on or before December 31, 2023, they are considered ineligible for the Kiddie Tax for that tax year.
Kiddie Tax Exceptions and Considerations
While the Kiddie Tax primarily targets children with unearned income exceeding $2,200, there are exceptions and special considerations. It’s important that taxpayers should be aware of for the 2024 tax year. These exceptions can influence whether a child is subject to the Kiddie Tax or if their income is taxed at their rates.
- Earned Income: This tax only applies to unearned income, such as interest, dividends, and capital gains. Therefore, income from wages, salaries, and self-employment is generally not subject to the Kiddie Tax. However, earned income may still be subject to regular income tax rates.
- Exceptions for Certain Situations: This tax may not apply in specific situations, even if the child meets the age and income thresholds. For example, if the child is married and filing jointly, or if they’re not a U.S. citizen or resident alien for tax purposes, they might not be subject to the Kiddie Tax. Additionally, certain distributions from qualified disability trusts or the child’s trusts may be exempt.
- Net Investment Income Tax (NIIT): Apart from the Kiddie Tax, certain high-income individuals might also be subject to the Net Investment Income Tax (NIIT). This tax applies to the lesser of net investment income. This also applies to the amount by which modified adjusted gross income exceeds the applicable threshold. Therefore, it’s essential to consider both the Kiddie Tax and the NIIT when evaluating a child’s tax liability.
Additional Considerations
- Planning Strategies: Families can employ various planning strategies to mitigate the impact of this tax. These strategies may include investing in tax-efficient accounts. These are 529 plans or custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Additionally, timing the realization of capital gains or distributing income-producing assets among family members can help optimize tax outcomes.
- Future Legislative Changes: Tax laws are subject to change, and future legislative reforms may impact the rules. Staying informed about potential updates and consulting with tax professionals can help taxpayers adapt their strategies accordingly.
Scout Tax’s Commitment to Excellence
At Scout Tax, we’re committed to providing personalized tax solutions tailored to our clients’ unique circumstances. Our team stays abreast of the latest tax developments. Additionally, we leverage our expertise to effectively navigate complex regulations like the Kiddie Tax. Whether you’re a parent seeking guidance on your child’s tax situation or a young taxpayer navigating your obligations, we’re here to offer clarity and support.
Contact Scout Tax today to schedule a consultation with Gil Pocker, EA, and our team of tax professionals. Let us help you optimize your tax strategy and confidently achieve your financial goals.
