What are the regulations for calculating taxable income for children who were claimed as dependents?
The Kiddie Tax rules for 2024 aim to prevent parents from transferring significant amounts of investment income to their children in order to take advantage of lower tax rates. These are the primary points to follow:
- If a child's unearned income (interest, dividends, capital gains, etc.) is more than $2,600, the parents' marginal tax rate will apply.
- Children under 18 and full-time students aged 19 to 23 who are not responsible for providing over half of their own support are both subject to the Kiddie Tax.
- A child may have to file a tax return if their unearned income exceeds $1,300.
If their total income, including both earned and unearned income, exceeds $14,600, they will likely have to file. - Using Form 8814, parents have the option to include their child's interest, dividends, and capital gains distributions on their own return. If the child's gross income is less than $13,000 and their only sources of income are interest and dividends.
Here is an explanation and a demonstration on how to calculate the kiddie tax.
Jeysson, whose age is 16, worked part-time and earned $5,200. Additionally, he received $4,200 in interest and dividends on stock investments. Jeysson is obligated to pay 10% of his marginal tax rate. His family's marginal tax rate is 35%. How much tax does Jeysson have to pay on his income?
The Kiddie Tax prevents parents from transferring income to their dependent children, who typically face lower marginal tax rates. For tax year 2024, a dependent child’s gross unearned income over $2,600 (but not to exceed the child’s taxable income) is net unearned income and is taxed at the parents’ marginal tax rate. Any income the child earns that goes beyond their net unearned income is taxed at their child's rate, which is lower than their parents' rate. Jeysson has a tax obligation of $775 for 2024.
- Unearned income $ 4,200
- Earned income $5,200
- Standard deduction $(5,650) ($5,200 + $450)
- Equals taxable income $ 3,750
- Net unearned income 1,600 [lesser of $3,750 or ($4,200 – $2,600)]
- Kiddie Tax (parents’ rate) 560 ($1,600 × 35%)
- Regular tax (child’s rate) $215 [($3,750 – $1,600) × 10%]
Total tax = $ 775 ( $560 + $215)
