Children who receive investment income or other unearned income are subject to special tax rules that affect how parents must report the child’s investment income. This is to prevent parents from putting investments in their children’s names, hoping that any investment profits would be taxed at the child’s lower tax rate based on their lower income. Instead, the federal government taxes children’s unearned income by taxing some of it at the parent’s tax rate – known as the “Kiddie Tax.”
Some parents can include their child’s investment income on their tax return, while other children may have to file their own tax return. If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.
Unearned Income
Unearned income includes all forms of investment income, including interest, dividends and most rent and royalty income. It also includes capital gains—the profit you make when you sell something for more than what you paid for it. If your child’s 2024 unearned income totals more than $2,600, either your child must file their own investment income taxes or you must report your child’s income on your own return.
Reporting of Child’s Unearned Income
Reporting is done through Form 8615, Tax for Certain Children Who Have Unearned Income, and is used for calculating how much tax applies to the child’s income. Form 8615 is filed with the child’s federal tax return. For 2024, Form 8615 needs to be filed if the child has more than $2,600 in unearned income
Age Requirements
The child must meet one of the following age requirements:
• Under age 18 at the end of the tax year,
• Age 18 at the end of the tax year and didn’t have earned income that was more than half of the child’s support, or
• A full-time student at least age 19 and under age 24 at the end of the tax year and the child didn’t have earned income that was more than half of the child’s support.
In addition, at least one of the child’s parents must be alive at the end of the tax year.
Tax Rate
In general, in 2024 the first $1,300 worth of a child’s unearned income is tax-free. The next $1,300 is taxed at the child’s income tax rate for 2024. Any unearned income above $2,600, however, is taxed at the marginal tax rate of the parent(s), that is usually higher than the child’s rate.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
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