Kiddie Tax: When Does it Apply?  

Special tax law provisions apply to certain children with unearned income. Generally, unearned is interest, dividends, capital gains, custodial account income and taxable income produced by scholarships. These provisions do not apply to earned income – like W-2 income from a summer job though they may require a return filing.   

Who Qualifies as a Kiddie 

The Kiddie Tax rules were established to discourage parents from shifting income to dependent children. Currently, the rules apply to those under 19 and full-time students under age 24 unless they have earned income in excess of half their annual support. If a dependent child is in college and parents pay tuition, Kiddie Tax likely applies.  

Kiddie Filing Threshold  

For 2023, the first $1,250 in unearned income is tax-free. The next $1,250 is taxed at the child’s rate of 10%. So, basically, the total threshold is $2,500. Unearned income above $2,500 is taxed at the parent’s rate. No filing is required if a dependent child has an unearned income of $1,250 or less. 

What About Earned Income   

If a dependent child has earned income (W-2) no return is required unless the amount exceeds $12,950 for 2023. Even if not required to file, you might choose to do so if the result is a refund from withholding. Rather than pay for a return, consider letting your child file using IRS free file.  

Ideas to Reduce Kiddie Tax 

  • If the invested funds are for college and require a return filing and tax, consider using a 529 plan. No current taxable income, and if distributions are for qualified education expenses, the distributions are not taxable.  
  • Consider tax-deferred investments – for example, growth-oriented stocks or mutual funds.  
  • Monitor income during the year and, if near the threshold, defer capital gains, if possible.  
  • Invest in Muni bonds or muni bond funds.  

Additional questions? Contact your Dent Moses advisor.