The kiddie tax applies to dependents under age 19 and full-time students under 24. To determine if a dependent child is subject to the kiddie tax, do the following:
- Add up the child’s net earned income and net unearned income.
- Then subtract the child’s standard deduction to arrive at taxable income.
- The portion of taxable income consisting of net earned income is taxed at regular rates while the portion of taxable income consisting of net unearned income over $2,200 this year is taxed at the parents’ marginal federal income tax rate.
Strategy to Gifting to Children
Thus, if you have kids, tax planning would focus on keeping investment interest, dividends and capital gains below $2,200, where taxes will be low.
Once the kiddie tax no longer applies, more investment income can be taxed at lower rates. Gifting highly appreciated shares to adult children who are not subject to the kiddie tax, while staying under the $15,000 annual gift tax exclusion limit, can be a good strategy if the children are in very low income tax brackets.