Do your kids earn interest and dividends from investments you've made for them? They could be subject to the kiddie tax. Find out when the kiddie tax applies and recent changes that expanded the kiddie tax. For current year limits, see the kiddie tax 2011.
If a child's interest plus dividends plus other investment income total more than $1,900, part of the child's income will be taxed at the parent's tax rate instead of the child's tax rate. It doesn't include income the child earned from a job or self-employment. Other taxable income for children is explained in Child Tax Filing.
Why it Exists:
It was common for very wealthy parents to gift their children stock. The children would sell the stock and pay lower capital gains rates than the parents. Congress realized they were losing revenue on this income shifting strategy.
How it Affects College Savings:
Unfortunately, many parents who were saving for their children's college expenses using custodial accounts, before 529 plans existed, are also caught by the kiddie tax. The investment income from the custodial accounts will be subject to income limits of the kiddie tax, especially with the recent changes in age limits.
Recent Changes to the Age Limits:
Over the past few years, the age limits for the kiddie tax have expanded. Here is the age limit for each year:
- Prior to 2006: Under 14.
- 2006 and 2007: Under 18.
- 2008 and after: Under 19, and dependent, full-time students under 24.
File Your Taxes:
To estimate the impact of the kiddie tax on your own return, you can use CompleteTax to determine the amount of tax due on your child's investment income.