To avoid paying taxes on their earnings, some individuals allocate some of it to their children by listing it in their names.
However, the IRS caught wind of this and created a law to check the rate at which people exploit this. The rule is that any fund allocated to a child that is not earned from being employed would be taxed when a certain threshold is crossed. The ages of 0-18 define a child here, and below age 24 if that child is studying a full-time course.
This rule came into effect in 1986 initially, and additional changes were made in 2005. The Tax Reform Act (the law that brought about these changes) directed that any earnings or investments allocated to a child above $2,100 will be taxed if there is no proof that the kid earned it. For part-time earners, the threshold was put at $6,300 and is to be taxed separately from the child’s employment earnings.
The way parents go about filing children’s taxes when this threshold is crossed can happen in either of two ways:
One, they can either file for the child’s tax return separately, or
Two, they can add it to theirs and file it jointly.
However, if a child’s unearned funds exceed the $10,000 mark, it is required by law that separate tax returns are filed for that fund. Other additional factors would require filing a child's tax returns separately, such as age or support costs.
Instances where kiddie tax is applicable.
Here are cases where kiddie tax applies
When parents or guardians purchase stocks in their child or ward's name to fund their schooling.
When money is put away regularly in the child's name just because of the reason mentioned above.
While all these are beneficial to the child and secure their future, the IRS has mandated that, once the threshold of those funds exceeds the benchmark of $2,100, there will be taxes. It could be separately or jointly, and when the funds further exceed the $10,000 mark, it must be filed separately.
To know which process of filing for taxes is best, parents/guardians should compare IRS forms 8615 and 8614 to know which applies best to the situation. Regardless of which route is taken, the taxes must be paid.
Who Gets To Pay Kiddies Tax?
The following categories of children get to pay the kiddie tax.
Children between the age of 0-18 who have no proof of earnings.
Children who are 19 years of age at the end of the tax year, and do not cover at least half the cost of their welfare, and
Children under the age of 24, who are either part-time workers or full-time students, and whose earnings do not cover up to half the cost of their welfare.
A full-time student that has attended college for at least five months consistently.
Regardless of whether the child is categorized as dependent on the parents’ taxes, there will be taxes if their earnings exceed the threshold.
However, if that child is married and filing jointly with their spouse, they are exempted from the kiddie tax law.
More explicitly, any income-generating channels, such as real estate, stocks, bonds, that is registered in a child’s name, and the child is not within the age bracket of an income earner or has no proof of having earned that income; when the benchmark for taxation of funds allocated for children is crossed, the kiddies tax law kicks in.
However, if the child has a job and is already earning an income either through self-employment, part-time or full-time jobs, then their earnings from their employment will be taxed separately and are not under the kiddies law.
If your child’s unearned income comes between the range of $10,000 and $11,000, you could elect to either file separately or jointly with yours. But if you choose to add your child’s taxes to your own, you could increase your tax rates.
Otherwise, it will be advisable to file all unearned income separately by your child/ward that exceeds $2,100. You could use the IRS 8615 form for this purpose, as it is precisely for Children With Unearned Income.
How To Calculate Kiddies Tax
According to the Tax Reform Act, any income allocated to a child that is not earned, which falls within the bracket of $100-$1,100, is not taxed.
When the unearned income falls between $1,100 and $2,100, it gets taxed, but at a child’s rate. However, when this income crosses the $2,100 mark, it is taxed at the parent’s/guardian’s tax rate.
The child’s taxes can then be either filed separately or jointly with the parents’ tax returns.
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