In 1986, a law was passed that prevented parents from shielding money from taxes by transferring investments to their children's names. Before then, the children's investments were taxed at the child's low rate, and some wealthy parents would move investments to their children specifically to reduce their own tax liability. The "kiddie tax" law changed the rules.
The "kiddie tax" is tax on a child's unearned income (investment income). Investment income generally includes interest, dividends, and capital gains. It also includes other unearned income, such as passive income from a trust and K-1 investments.
If your child is under age 18 (and in certain situation if the child is older) use form 8615 to figure your child’s total tax on unearned income over $2,200. Note that the child tax rate will be based on the tax rate of their filing parent. If you are required to file form 8615, you may be subject to the Net Investment Income Tax (use form 8960 to figure out this tax).
Parents may be able to elect to report child's investment income on your return if the investment income was more than $1,100 but less than $11,000 for the year. If you make this election, your child won't have to file a tax return. To make this election, attach form 8814 Parents’ Election to Report Child’s Interest And Dividends, to your tax return. Form 8814 applies a child’s tax rate to the first $2,200 of their investment income, and the parent’s tax rate to the remainder.
TAX PLANNING OPPORTUNITY
If your family paid the kiddie tax in 2018 or 2019, you could be eligible for a refund.
The Tax Cuts and Jobs Act of 2017 effectively raised the kiddie tax by basing it on the tax rates used for estates and trusts, instead of the rates used for parents. That change has since been repealed, so if you calculated your child’s liability using estate and trust tax rates in 2018 or 2019, you have the option to file an amended return using your tax rate for your child’s unearned income instead. Just be sure the potential refund is worth the additional paperwork and any associated preparation costs.
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