The Kiddie Tax is applied to the amount of your child's unearned income that exceeds $2,100. The Kiddie Tax rate is your marginal tax rate (the highest rate applied to the last dollar you earned) which could be as high as 39.6%.
For example, if your 13-year old daughter had $3,000 in unearned income last year, $900 of that would be subject to the Kiddie Tax. In the highest tax bracket, the Kiddie Tax on that amount would be $356.
The Kiddie Tax was designed to discourage parents who hoped to reduce their taxes by shifting their investments over to their children. At one time, it only applied to children under age 14. That's how it got its name.
Generally, your child is affected by the Kiddie Tax if their unearned income exceeds $2,100 and they are:
- Under age 18 at the end of 2015;
- Age 18 at the end of 2015, with earned income that is less than (or equal to) half of their support for the year; or
- Age 19-23 at the end of 2015, with earned income that is less than (or equal to) half their support, and they are full-time students.
On the other hand, your child would not be subject to the Kiddie Tax if:
- They only had earned income;
- They are not required to file because their income is below the filing threshhold;
- They are filing jointly.