Article Date:
July 2023

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Refresher on the Kiddie Tax and How to Avoid It

In the good old days, you could divert some investment income and gains to your kid(s) and they could pay taxes on the income and gains at their lower federal income tax rates.


That was then.


This is now.


Our beloved Congress installed the so-called kiddie tax to mostly shut down this tax planning strategy.


Under the kiddie tax rules, a portion of a so-called child’s net unearned income can be taxed at the parent’s marginal federal income tax rate.


We say “so-called child” because the kiddie tax can potentially hit your child until the year during which he or she turns age 24. We will refer to anyone who is under age 24 as a “child” just to keep things simple.


Kiddie Tax Basics


The important thing to understand is that the kiddie tax rules can cause a portion of an affected child’s net unearned income to be taxed at higher rates than would otherwise apply.


Specifically, the portion of a child’s taxable income that consists of net unearned income that exceeds the annual unearned income threshold is potentially subject to the kiddie tax.


If the child’s net unearned income for the year does not exceed the threshold for that year, there is no kiddie tax issue for that year.


If the child’s net unearned income exceeds the threshold, only the excess gets hit with the kiddie tax.1


For 2023, the unearned income threshold is $2,500. For 2022, it was $2,300.2


Age Is the Key Factor in Determining Potential Exposure to the Kiddie Tax


As stated earlier, the kiddie tax can never impact someone who is age 24 or older at year-end.


For someone who is age 19–23 at year-end, the kiddie tax can apply only if he or she is a student for that year.


But a child who is age 18 or under at year-end is almost always exposed to the kiddie tax if the child’s net unearned income exceeds the annual threshold.


More specifically, the ... Log in to view full article.

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