Special tax rules apply to children under the age of 24 who receive investment income over $2,100. Investment income generally includes interest, dividends and capital gains. Congress enacted the Kiddie tax to prevent parents from shifting investment income to their dependent children.
The so-called Kiddie Tax rules may affect the amount of tax and how to report the income. Specifically, a child’s investment income in excess of the applicable annual threshold $2,100 in 2017, is taxed at the parents rate. For example the first $1,050 of the child’s unearned income is not taxable. The next $1,050 is taxed at the child’s tax rate which is typically 0% on long-term capital gains and dividends and interest. The amount over $2,100 is taxed at the parent’s marginal federal income tax rates typically 15% on long-term capital gains and dividends and up to 39.6% on ordinary income. Note that between ages 19 and 23, the Kiddie Tax is only an issue if the child is a student, and the child’s earned income didn’t exceed one-half of the child’s own support for the year, excluding scholarships. The year the child turns age 24 and for all subsequent years, the Kiddie Tax ceases to apply.
Parents may include your child’s investment income on your tax return if it was less than $10,500 for the year. If you make this choice, your child will not have to file his or her own tax return and the parent would include IRS Form 8814, Parents’ Election to Report Child’s Interest and Dividends with their 1040.
If your child’s investment income was $10,500 or more in 2017 then the child must file IRS Form 8615 with their own return.
Although you will escape the Kiddie Tax after your child turns 24, there is another deadline if you set up a Coverdell Education Savings Account (CESA) for a child or grandchild. THE CESA must be liquidated within 30 days after your child turns 30 years old. To the extent earnings included in a distribution are not used for qualified higher education expenses, they are subject to federal income tax plus a 10% penalty tax. Alternatively, the CESA balance can be rolled over tax-free into another CESA set up for a younger family member under the age of 30.
If you have any questions about the Kiddie tax or taxes in general call Gregory J. Spadea at 610-521-0604.
