Kiddie Tax - How Does Kiddie Tax Work

In our last blog post, we discussed some exceptions on kiddie tax reporting.  If your child does face kiddie tax, how does it work?  We will use 2014 as the example year to discuss.

Generally, the Kiddie Tax applies the parents’ highest tax rate to any unearned income of the child that is greater than $2,000 for 2014.

A child can have unlimited earned income from work without worrying about the Kiddie Tax. Earned income of a child (from working a summer job for example) is not subject to the Kiddie Tax.

However, unearned income greater than the income limit will be taxed at the parent’s tax rate if the child falls under the Kiddie Tax rules. Of the unearned income, the amount under the income limit is taxed at the child’s rate and the excess gets taxed at the parents’ highest rate.

The age rules for the Kiddie Tax can be a bit confusing. The Kiddie Tax applies:

• Until the year the child turns 18 regardless of earned income.
• In the year the child turns 18 unless the child's earned income is more than half his or her overall support.
• In the years your child turns 19 through the year your child turns 23, if the child is a full-time student during any part of at least five months during the year unless the child's earned income is more than half his or her overall support.

In our next blog post, we will discuss who reports kiddie tax on the tax return.