CARL WATTS & ASSOCIATES

July 15, 2019

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Children with Unearned Income
"The Kiddie Tax"
The Kiddie Tax, which refers to the tax rules for children who have investment income, was designed some 33 years ago to prevent high-income families from passing their unearned income to their children to avoid paying higher tax rates. At one time, it only applied to children under age 14 (the minimum age of employment), hence its name.

The Kiddie Tax went through several changes since it was first established and the Tax Cuts and Jobs Act (TCJA) of December 2017 had its own impact .




You will find in this newsletter the most relevant information about this topic.

For tax purposes, unearned income means all taxable income other than earned income and includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, isn’t included in gross income.

Prior to the TCJA, if a child’s net unearned income was above an indexed threshold, it would be taxed at the parents’ tax rate (if the parents’ rate was higher). Under the TCJA, if a child’s unearned income is above the specified threshold, it will be taxed at the trust and estate tax rates as seen in the chart below. For 2019, the threshold amount is $2,200 ($2,100 for 2018).


If taxable income is:
The tax is:

  • $2,600 and under
  • Over $2,600 but not over $9,300
  • Over $9,300 over $12,750
  • Over $12,750
  • 10% of the taxable income
  • $260 plus 24% of the excess over $2,600
  • $1,868 plus 35% of the excess over $9,300
  • $3,075.50 plus 37% of the excess over $12,750




For long-term capital gains and qualified dividends income:
The tax is:

  • Up to $2,600
  • Over $2,600 but not over $12,700
  • Over $12,750
  • 0% of the taxable income
  • 15% of the taxable income
  • 20% of the taxable incomef the excess over $9,300


The tax rates that apply to the kiddie tax are temporary. The changes made by tax reform expire for taxable years beginning after Dec. 31, 2025.

The kiddie tax applies for a child with a living parent and who belongs to the following age groups:

  • Children younger than 18;

  • Children age 18 whose earned income does not exceed one-half of their support;

  • Children at least age 19 but younger than 24 who are full-time students and whose earned income does not exceed one-half of their support.
In general, a child is required to file a tax return if:

  • Unearned income is over $1,100,
  • Earned income is over $12,200 (the standard deduction for 2019), or
  • Earned and unearned income together total more than the larger of (1) $1,100, or (2) total earned income (up to $11,850) plus $350.


If the child files a tax return, Form 8615, Tax for Certain Children Who Have Unearned Income, is required to be attached to the tax return.

If your child is required to file a tax return, they may also be subject to the Net Investment Income Tax (NIIT) which is 3.8% tax on the lesser of net investment income or the excess of the child's modified adjusted gross income over the threshold amount set for the respective year.

A parent, may be able to avoid having to file a tax return for the child by including the child's income on the parent's tax return. To make this election, attach Form 8814, Parents' Election to Report Child's Interest and Dividends, to your Form 1040 or Form 1040NR if your child meets all of the following conditions:
  • The child was under age 19 (or under age 24 if a full-time student) at the end of the tax year.

  • The child’s only income was from interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends.

  • The child’s gross income for 2018 was less than $10,500.



  • The child is required to file a return.

  • The child does not file a joint return for 2018.

  • There were no estimated tax payments for the child for 2018 (including any overpayment of tax from his or her 2017 return applied to 2018 estimated tax).

  • There was no federal income tax withheld from the child’s income.

If you elect to report your child’s income on your return, you cannot take certain deductions that your child could take on his or her own return such as: additional standard deduction of $1,600 if the child is blind, penalty on early withdrawal of child’s savings, and itemized deductions such as the child’s charitable contributions.

On the other hand, children with smaller unearned incomes can pay less under these tax rates. If your child received qualified dividends or capital gain distributions, you may pay more tax if you make this election instead of filing a separate tax return for the child. However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions.

If any of the above apply to your child, first figure the tax on your child’s income as if he or she is filing a return (Form 8615). Next, figure the tax as if you are electing to report your child’s income on your return (Form 8814). Then, compare the methods to determine which results in the lower tax.

If you have more than one child with unearned income, you must repeat this process for each child.

Pay attention to the IRS instructions on determining your child's age. The IRS tax year is slightly different than the calendar year when it comes to the kiddie tax. You can find many more details of interest in Publication 929, Tax Rules for Children and Dependents.


It is also important to remember that the IRS considers any taxable income a child earns as the child’s, but in the end, the parent is liable for filing the return and for any taxes owed on the taxable income.

Our recommendation is, obviously, that you consult a tax professional or a financial advisor to make sure all options are considered and suitable tax-planning is in place to reduce the kiddie tax to the minimum allowable or avoid it altogether.
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