Minors, individuals under the age of 18, are generally subject to the same tax laws as adults. However, there are specific rules that apply to the taxation of unearned income, such as dividends, for children. Understanding these rules is crucial for parents and guardians to ensure proper tax compliance and minimize tax liability.
The Kiddie Tax
The “kiddie tax” is a provision in the tax code that imposes a tax on the unearned income of children under the age of 18. Unearned income includes dividends, interest, capital gains, and other passive income sources. The kiddie tax is designed to prevent parents from shifting investment income to their children to avoid paying higher taxes.
The kiddie tax applies if the child’s unearned income exceeds $2,500 for the tax year. The tax rate for unearned income over $2,500 is the child’s marginal tax rate, which is typically the same as the parent’s tax rate.
Parental Election
Parents may elect to report their child’s unearned income on their own tax return instead of having the child file a separate return. This election is available if the child meets the following criteria:
- The child is under the age of 19 (or under age 24 if a full-time student).
- The child’s gross income is less than $12,500.
- The child’s income is solely from interest and dividends (including capital gain distributions).
By making this election, parents can avoid the kiddie tax and simplify the tax filing process.
Tax Implications for Minors
If a minor’s unearned income is subject to the kiddie tax, the child may be responsible for paying taxes on that income. The tax liability will depend on the child’s income and the applicable tax rates.
If the child’s unearned income is below $2,500, the child is not subject to the kiddie tax. However, the child may still be required to file a tax return if their total income exceeds the standard deduction.
Tax Implications for Parents
Parents who elect to report their child’s unearned income on their own tax return are responsible for paying any taxes due on that income. The child’s unearned income will be included in the parent’s taxable income and taxed at the parent’s marginal tax rate.
Understanding the kiddie tax and parental election is essential for parents and guardians to ensure proper tax compliance and minimize tax liability. By carefully considering the rules and making informed decisions, parents can optimize their tax situation and avoid unnecessary tax burdens.
Dividend Taxes: Everything Investors Need to Know
FAQ
Do I need to report my child’s dividend income?
Do minors have to pay taxes on stocks?
Do I have to report my child’s 1099?
Do I have to file taxes if my parents claim me as a dependent?
Do minors have to pay taxes?
A minor who earns tips or makes more than $400 (tax year 2023) in self-employment income will typically have to pay Social Security or Medicare taxes, regardless of their total earnings. How do I know if my minor child has to file an income tax return?
Can I include my Child’s interest and dividend income on my tax return?
You may be able to elect to include your child’s interest and dividend income (including capital gain distributions) on your tax return. If you do, your child won’t have to file a return. You can make this election only if all the following conditions are met.
Do I have to pay taxes on my child’s investment income?
Either your child must file his/her own investment income taxes or you must report your child’s income on your own return if your child’s income totals more than $2,500 from these: Use Form 8615 to figure the tax on your child’s investment income.
Do minor children need to file taxes?
Whether or not minor children need to file an income tax return depends on many factors such as earned income from a job including self-employment, unearned income typically from investments, or the need to claim a refund. At what earned income does my child have to file taxes?