Kiddie Tax Calculation Made Simple !

Kiddie tax is a special rule for taxation of a child’s unearned Income if certain other conditions are fulfilled. In other words, a child’s earned income like wages etc – suffer taxation same as me or you, but if he/she as unearned income like interest , dividend etc – then special rule called Kiddie Tax will apply on such unearned income.

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) has now simplified the Kiddie Tax rules to a great extent by inserting new provision – Sec. 1(j) to the Internal Revenue Code. Sec. 1(j)(4) provides the new kiddie tax rules

What is considered unearned income ?

It is simple . Income that is not earned but accrues to a person (kid) . 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 scholarship ,
• 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.

4 Conditions for Kiddie Tax Application

New rules under TCJA is that any child claimed as a dependent may be subject to the kiddie tax if four conditions ( tests) are satisfied.

(i)Age Test

• he/she should be younger than 18, or
• If he/she is at least 19 years but less than 24 years and a full time student ,then he/she should not earn more than 1/2 of their support(excluding scholarship)

(ii) Unearned Income Test

The child must have had unearned income more than $2,200 for Tax Year 2019 ( $2,100 for 2018).

(iii) Tax filing Test

The child should not file joint tax return

(iv) Live Parents Test

At least one of the parents should be alive by the end of tax year

Computation of Income for Kiddie Tax Purpose

Under the Tax Cuts and Jobs Act, unearned income above the threshold is taxed at tax rates applicable to a Trust. What it means is that you need to compute gross unearned income, then deduct the standard deduction. That will give the taxablenet unearned income.

How much is the Standard Deduction? A child is allowed a standard deduction for computing net unearned income. The allowable standard deduction for 2019 is the greater of: (1) $1,100 or (2) earned income + $350, not to exceed $12,000. So , in no case the standard deduction can be more than $12,000.

Computing Kiddie Tax

Once the Net Unearned Income is computed, you need to deduct the basic exemption amount of $2,200 for Tax Year 2019 ( $2,100 for 2018) . The Kiddie tax is only applicable if the net unearned income is more than the exemption amount. So the taxable unearned income is Net Earned Income minus the Exemption. You apply the tax bracket for kiddie tax which is the tax rate applicable to Estate or Trust. Click 2019 & 2018 kiddie tax bracket for tax brackets.

1. Add child’s net earned income and net unearned income.
2. Then subtract the child’s standard deduction
3. That computes taxable income.
4. The portion of taxable income that consists of net earned income is taxed at the regular rates for a single taxpayer.
5. Out of the taxable income (step 2) , take out the net unearned income that exceeds the unearned income threshold ($2,200 for 2019) and apply the kiddie tax brackets for tax on unearnered income.

Have you used our Kiddie Tax Calculator?

File Kiddie Tax Form 8615

Tax Form 8615 is a form for figuring out your tax on unearned income. It must be filed if all of the four conditions given above are satisfied. Once , you filled out the form , you need to attach it with Form 1040 or Form 1040NR . You can read irs tax form 8615 guide