The “Kiddie Tax” for U.S. federal income tax purposes refers to a set of rules whereby children’s unearned income (i.e., investment income) is subject to increased tax rates and additional tax reporting obligations.
In general, dependent children with unearned income exceeding $2,500 are taxed at their parents’ higher tax rate. These rules prevent parents from shifting income-producing assets to their children to yield lower effective tax rates.
When it comes to reporting, the child can file their own Form 1040 (US Individual Income Tax Return), or the parents can elect to include the child’s investment income on their income tax return.
If the child files a separate Form 1040, the child calculates and reports the kiddie tax using Form 8615 (Tax for Certain Children Who Have Unearned Income). The child needs their parents’ completed tax return first in order to obtain the effective marginal rates. If the parents elect to include the income on their federal tax return, they include Form 8814 (Election to Report Child’s Interest & Dividends) with Form 1040.
Example Kiddie Tax Scenario
For example, John Doe and Jane Doe have one daughter, Mary, who is eight. Mary is a dependent and qualifying child for federal income tax purposes. John and Jane set up a brokerage account for their daughter and invested $150,000 into dividend-paying ETFs. The account generated $2,600 of dividend income during the year. Because Mary’s unearned income exceeds $2,500, the kiddie tax applies. The parents decide to include the investment income on their personal tax return, rather than have Mary file a separate Form 1040.
Video Tutorials
Please visit our channel for a video tutorial on completing Form 8615 and including it with the child’s separately filed Form 1040.
Please visit our channel for a video tutorial on completing Form 8814 for inclusion with the parent’s federal income tax return.
Additional Information
Taxpayers can find more information on the kiddie tax by visiting the IRS website and viewing the instructions on Form 8814 and Form 8615.