Are you a parent or guardian of a child under the age of 18? Do you have questions about how their income is taxed? You may have heard of the Kiddie Tax, but do you know what age it applies to?
The Kiddie Tax is an important tax concept that all parents should be aware of. It is a tax on the unearned income of children under the age of 18, and understanding it can help you make the best financial decisions for your family.
At Creative Advising, we are certified public accountants, tax strategists, and professional bookkeepers who specialize in helping families understand and manage their taxes. In this article, we’ll explain the Kiddie Tax and answer the question: What age does the Kiddie Tax apply until?
The Kiddie Tax was created in 1986 to prevent parents from shifting their income to their children to take advantage of lower tax rates. The tax applies to children under the age of 18, and is based on their own unearned income, such as investments or gifts. The tax rate is based on the parent’s tax rate, and any income over a certain threshold is taxed at the parent’s rate.
For 2020, the Kiddie Tax applies to children under the age of 18, and any income over $2,200 is taxed at the parent’s rate. This means that if your child has an income of over $2,200, the amount over the threshold will be taxed at the parent’s rate.
At Creative Advising, we can help you understand the Kiddie Tax and how it applies to your family. We can help you make the best financial decisions for your family and ensure that you are taking full advantage of the tax laws. Contact us today to learn more about the Kiddie Tax and how it applies to your family.
Definition of the Kiddie Tax
The Kiddie Tax is a federal income tax specifically designed to prevent families from taking advantage of lower tax rates when filing income for their children. The IRS uses the parents’ marginal tax rate instead of the child’s marginal tax rate to tax the child’s unearned income. It applies to the unearned income of children that are under the age of 18 or under 24 if they are currently a full-time student at recognized educational institutions. The tax is figured using the tax rates of the child’s parents for any money the child has earned unless the parents have signed a Form 8615 and claimed the child on their federal income tax return.
The main criteria for this tax apply to children whose parents are required to file a joint filing return, meaning that if the child’s parents earn above a certain income level, then the Kiddie Tax must be applied, regardless of age. If the parents file separate returns, the parent with the higher income determines the tax rate and then the tax must be applied to any income earned over the higher parent’s standard deduction.
The tax rates for the Kiddie Tax are the same as the parent’s tax rate, so if the parent is in the 22 percent or higher tax bracket, then that is the tax rate that would applied to the child’s unearned income. The tax can be avoided altogether if the parent puts the child’s earned income in an account specifically for the child or if the parent claims the child as a dependent on their own tax returns.
The age limit for the Kiddie Tax is 18, or 24 if the child is a full-time student at a recognized educational institution. However, there are some exceptions to this rule, such as when the child is disabled, or if the child serves in the military or is self-supporting. In these instances, the age limit may be surpassed and the Kiddie Tax still applies.
Tax planning strategies can be used to minimize the amount of Kiddie Tax that parents must pay. This includes setting up a 529 college savings plan, investing in U.S. Series I savings bonds, and taking advantage of the Child Tax Credit when applicable. Additionally, parents should consider taking steps to reduce the amount of unearned income their children are receiving, such as changing investments to those that produce more long-term capital gains and dividends rather than short-term capital gains or interest income.
By understanding the Kiddie Tax and its potential implications, parents can plan ahead and limit their tax burden when it comes time to file income tax returns for their children’s earnings.
Criteria for Applying the Kiddie Tax
The kiddie tax, also known as the children’s unearned income tax, was created to discourage wealthy families from sheltering their income from taxation by transferring it to their children’s name. The kiddie tax applies to children under the age of 24, unless otherwise noted, and whose parents report their income on a joint return. The tax applies to unearned income that is primarily or solely generated from investments, such as dividends, mutual fund income, and capital gains from the sale of stock.
When the kiddie tax is applied, a portion of the child’s unearned income is reported on their parent’s tax return. The child will then receive what is called a “kiddie tax form” that will report the tax amount. The tax amount is then paid by the parent.
What age does the kiddie tax apply until? The kiddie tax applies to those under the age of 24, unless noted otherwise. However, there are certain exceptions to this age limit, such as those who are full-time students and receive more than half of their financial support through their parents. It is important to note that the kiddie tax rate can differ if certain exceptions are met. Therefore, it is important to discuss your tax situation with a certified public accountant to ensure that you are in compliance with the tax law.
Tax Rates for the Kiddie Tax
The tax rates associated with the Kiddie Tax vary depending on a child’s total unearned income amount for the year. Generally, the tax rate will not exceed the parents’ highest tax rate. This provision of the Kiddie Tax helps ensure that a child’s income is not disproportionately taxed at higher rates than incomes of their parents. Unearned income below $2,200 for the year is not subject to the Kiddie Tax, as this amount falls within the standard deduction reported by most taxpayers. Additionally, capital gains and qualified dividends generally up to $2,200 are not subject to the Kiddie Tax since they are subject to the 0% capital gains tax rates.
Additional tax on unearned income beyond the $2,200 threshold is taxed at the normal trust tax rates applicable to that amount, except for amounts exceeding $12,750 which may be taxed at the highest tax bracket. If the child has both earned and unearned income, the tax rate of the earned income applies to the total income, and the Kiddie Tax does not apply.
What age does the kiddie tax apply until? The kiddie tax applies to unearned income from children whose parents are alive, up to the age of 18. If the child is under 24, unmarried, and a full-time student, the kiddie tax continues to apply until age 24. In some cases, parents may be able to extend the kiddie tax to age 26, but this depends on the income of the child.
Tax Planning Strategies to Minimize the Kiddie Tax
At Creative Advising, we understand that taxpayers are always looking for ways to reduce their tax liability. With this in mind, we focus on proactively helping clients plan ahead to minimize the impact of the kiddie tax. Here are some of the strategies Tom Wheelwright and the team at Creative Advising recommend.
The most drastic strategy for reducing the kiddie tax is to invest in growth-oriented income such as dividends or capital gains that would be taxed at an adult’s marginal rate. Secondly, taxpayers can prioritize strategic investing to shift income to accounts owned by the parents that escape the kiddie tax calculation. And finally, gifting income producing assets to children may be an option if the taxpayer pays the gift tax resulting from the gifts.
At Creative Advising, we believe in preparing for the kiddie tax by planning in advance. This reduces tax liability and encourages smarter investing for a strong financial future.
What age does the kiddie tax apply until? The kiddie tax applies until the year that the child turns 18 or turns 24 if the child is a full-time student. The kiddie tax applies to any income earned by a child under these ages, including any investments, wages, distributions, or any other sources of income.
Exceptions to the Kiddie Tax Age Limit
The Kiddie Tax Age Limit is generally 18-years-old or younger; however, there are some exceptions. Those over 18-years-old can qualify for an exception under certain conditions. These exceptions include full-time students or disabled dependents. If the dependent is under 24 years old and is a full-time student, they may be exempted from the Kiddie Tax, as long as their earned income does not exceed certain limits. As long as their income does not exceed their educational expenses, the full-time student can be exempt from the Kiddie Tax. Disabled dependents who are not full-time students qualify for an exemption if the dependent’s earned income does not exceed the limit set by the government.
The Kiddie Tax applies to those under the age of 18. Exceptions may be made for those 18 or older if they meet certain criteria, such as being a full-time student or a disabled dependent. Careful tax planning strategies can be used to minimize the Kiddie Tax in these circumstances.
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