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Definition: Kiddie Tax
Kiddie tax was introduced so that parents don’t take advantage of their children, by transferring money in the form of gifts to their children and then taking tax benefits. So in Kiddie Tax the tax is levied on income unearned by the children but are in the name of the children to discourage parents to shift their investment to their children in order to pay less taxes. Tax rate is applied on the marginal tax rate basis thus each dollar earned is charged with the specific amount of tax.
The basic line is children’s unearned revenue if exceeds the amount of $2100 then the parents have to pay taxes with their own returns. It is prevalent in United states. The unearned revenue can be in the form of dividends, interest or any gain from the capital.
It is applicable to all children below the age of 19 and to all children below the age of 24 and are full time students or they earn income to support of half of his/her expenses. The first income earned of $1050 is not taxed while the next income is taxed.
The parents can file the returns in two ways either
1) They can file the return of the children separately under the kindle tax policy then the children will have their own tax rate
2) The parents can also file the taxes of their children with themselves and include in their own tax returns – this has one disadvantage this increases the income of the parents thus the tax slab can also change.
But parents in United States can save money for the children’s education to a tax advantaged account in order to save from kiddie tax and can save for children’s future education.