Kiddie Tax 2023 Tax Rules Made Simple!

Kiddie tax 2023 is a quick guide on the special rule for taxing a child’s unearned income if certain conditions are fulfilled. In other words, a child’s earned income, like wages, etc., suffers taxation the same as you or me, but if they have income from investments i.e., unearned income like capital gains, dividends, etc., a rule called Kiddie Tax will apply to such unearned income. Having child is an additional tax compliance burden, but there are tax benefits attached too! Have you tested our child tax credit calculator for 2022.

The kiddie tax law was enacted (first became effective for tax years beginning after Dec. 31, 1986 ) vide section 1(g) of the Internal Revenue Code to check the widespread diversion of income from parents to kids for availing exemptions and deductions. The Tax Cuts and Jobs Act (TCJA) simplified the Kiddie Tax rules to a great extent by inserting a new provision – Sec. 1(j) to the Internal Revenue Code. Sec. 1(j)(4) provides the new kiddie tax rules 

What is unearned income? 

It is an income that is not earned but accrues to a person (Kid for this article ). The aggregate of this “unearned income” is taxed under “Kiddie tax ” rules. The examples of unearned income can be as under: –

• interest,
• dividends, or 
• capital gains distributions, or
• taxable pension payments,
• rents, 
• royalties, or 
• Income from custodial accounts or property, even if the property was purchased with a child’s wages or given as a gift, or 
• taxable social security benefits, 
• taxable 
• fellowship grants not reported on Form W-2, 
• unemployment compensation, 
• alimony, and
• Any other income not earned by working income from a trust unless it is a qualified disability trust. 

When does the Kiddie Tax rule apply to a child’s income?

Kiddie tax rules apply if conditions in the following four types of tests are satisfied. These are the age test, income test, filing test, and parents’ alive test

(i) The Age Test: the child must satisfy one of the following two age conditions :

1. They are below 18 years, or
2. If the child’s earnings is less than 50% of their support, and they were:

• 18, or 
• if a school student for at least five months during the year, then below 24 years 

What is the benchmark date for the computing age of the child? The Kiddie tax age is counted as on January 1 . Therefore, if a child is 18 years on 1st January, he is considered 18 years in the previous tax year ending on 31st December. For example, if a child turns 18 years on January 1, 2023, she is treated as 18 for the tax year 2022. Therefore, the kiddie rules may apply to her.

(ii) The Income Test  is that the child must have unearned income (listed above)

(iii) The tax filing test: the kiddie tax does not apply in the following three circumstances :

1. The child files a joint tax return or 
2. The child is not required to file a tax return, or 
3. The child’s parents both die by the end of the tax year.

(iv) Live parents test- At least one of the parents must be alive.

Kiddie tax 2023 standard deduction, exemption

Tax Year(s)	Standard Deduction for Investments	Kiddie Tax Exemption	Max Std Deduction if there is an earned income
2023	$1,250	$2,500	$13,850
2022	$1,150	$2,300	$12,950

How is kiddie tax computed?

We have created an easy-to-use Kiddie Tax Calculator along with details computation methods with examples.

How is the kiddie tax reported?

The law provides 2 methods to calculate and report the kiddie tax. One method is to report the child’s income on his own return by filing Form 8615, Tax For Certain Children Who Have Unearned Income.

The other method is to include the child’s income on the parent’s return by filing Form 8814, Parents’ Election to Report Child’s Interest and Dividends. which can be opted if your child’s only income is unearned income and that is not more than than $13,850 for 2023 ($12,950 for the tax year 2022), you may be able to elect to include that income on your return rather than file a return for your child. See Form 8814, Parents’ Election To Report Child’s Interest and Dividends.

What is the Kiddie Tax 2023 AMT exemption limit?

The kiddie tax is affected by the AMT in that any unearned income over a certain amount for a child is subject to tax at the parent’s highest marginal rate. But as long as the child’s income is subject to kiddie tax and the parents are subject to AMT, the kiddie tax rate is the AMT rate. A child to whom the “kiddie tax” rule applies, the tax year 2023 exemption amount for the Alternative Minimum Amount (AMT) is equal to the sum of the child’s earned income and $8,800.