The Kiddie Tax
Tax on a child's investment income is figured in a special way. This tax is referred to as the kiddie tax. It is not a separate tax or an additional tax rate. It is merely a tax structure in place to eliminate the opportunity for parents to shift investment income to their child in a lower tax bracket. When the kiddie tax applies, the child's investment income (over a set amount) may be taxed at the parents' highest marginal tax rate.
The kiddie tax does not affect the way in which a child is taxed on his or her earned income from a job or self-employment. It only affects the tax on certain unearned income.
Under certain conditions, parents can elect to include the child's investment income on the parents' return and avoid the need to file a return for the child. This election may or may not be beneficial for the family.
General Rules of the Kiddie Tax
The kiddie tax applies to a child's investment income when all the following apply: