What is the kiddie tax?
It's a tax that's applied on your child's investment income of more than $1,900. The tax is meant to discourage parents from reducing their own taxes by shifting investments to their children, who normally have lower tax brackets.
While it once affected only children under age 14, it can be imposed for 2009 on the investment income of children up to age 23, depending on the circumstances.
NOTE: The tax applies only to investment income, such as interest and dividends, not income from wages or self-employment. Investment income includes interest and dividends.
How do I know if the kiddie tax applies to me and my children?Your children fall into one of these categories:
- Under age 18 and unmarried
- Under age 18 with earned income (from working) that is less than half of their support for the year
- Full-time student older than 18, but less than 24, at the end of 2009, whose earned income (if any) is less than half their support.
The tax kicks in when your child’s investment income exceeds $1,900. The first $950 is tax free, the second $950 is taxed at the child’s rate of 5% or 10% (depending on earned income).
Investment income above that amount is subject to the kiddie tax – that is, your marginal tax rate, Marginal tax rate is the rate of tax you pay on the last dollar you earned. That could be as low as 10% or 15% or as high as 28%, 33% or 35%.
Does my child need to file an income tax return?
- No, not if the investment income is less than $950.
- No, not if you elect to compute it on your return and these conditions are met: Your child’s 2009 income is only from interest and dividends; the total income is more than $950, but less than $9,500; and estimated 2009 tax payments were not made in your child’s name and Social Security number. CAUTION: Adding your child’s income to your return will increase yours, and could affect your ability to take certain deductions, such as those for an education credits and Roth IRAs.
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