Understanding the Kiddie Tax and How It Affects Your Family

– Income shifting is a tax strategy that transfers assets into children’s names to save taxes by moving income into lower tax brackets.
– The kiddie tax rules apply to children under 18 or college students under 24, with unearned income over $2,300, and tax savings from income shifting are limited.
– If the kiddie tax rules apply, children will be taxed on unearned income above $2,300 at their parents’ tax rates if higher. Different rules applied for the 2018 and 2019 tax years.
– To transfer income to a child, ownership of the asset producing the income must be transferred, not just the income itself. Property can be transferred using custodial accounts under state law. 1. Children can reduce or eliminate taxes on their investment income by investing in securities and mutual funds focused on capital growth, vacant land expected to appreciate in value, stock in a closely held family business, tax-exempt municipal bonds, U.S. Series EE bonds, traditional and Roth IRAs, 529 plans, and Coverdell education savings accounts.
2. If a child has earned income, it is taxed at the child’s regular tax rates, and parents may consider employing the child at their own business and paying reasonable compensation to save taxes within the family.
3. If the kiddie tax applies, it is reported on Form 8615. Parents can also elect to include the child’s income on their own return using Form 8814, if certain requirements are met. 1. Tax season can be stressful for many people.
2. Deductions and credits can help reduce the amount of taxes owed.
3. It’s important to keep accurate records of all income and expenses.

The Kiddie Tax: Does It Affect Your Family?