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What is the Kiddie Tax?

SOLVEDby TurboTax216Updated 2 weeks ago

The Kiddie Tax is the tax levied on the portion of your child's unearned income that exceeds $2,300. Children who only had earned income from a job or self-employment, don’t make enough money to be required to file, or are filing jointly with their spouses are exempt from the Kiddie Tax.

For tax year 2022, the Kiddie Tax applies if your child has unearned income (usually from investments) exceeding $2,300, is required to file a return, isn’t filing jointly, and was age:

  • 17 or younger at the end of 2022
  • 18 at the end of 2022, but only if their earned income (excluding scholarships in the case of a full-time student) didn’t exceed half of their support costs in 2022
  • 19–23 at the end of 2022, but only if they were full-time students and their earned income (excluding scholarships) didn’t exceed half of their support costs in 2022

Unemployment compensation is considered unearned income. A child who receives unemployment compensation may be subject to the Kiddie Tax, and as a result, may pay substantially higher tax than an adult receiving the same compensation. (This higher tax rate will apply to unearned income including investments and unemployment compensation, but normal income tax rates will apply to income earned from working.)

The Tax Cuts and Jobs Act (TCJA) made substantial changes to the Kiddie Tax in 2018 through 2025.

For 2018 and 2019, the Kiddie Tax was determined by the tax brackets and rates for trusts and estates. Here’s what those work out to:

  • The first $2,600 (after the initial $2,200) is taxed at 10%
  • The next $6,850 is taxed at 24%
  • The next $3,500 is taxed at 35%
  • Anything beyond that is taxed at 37%

However, the tax changes for 2020,  2021, and 2022 now make the Kiddie Tax revert back to using the parental rates, instead of the rates for estates and trusts like in 2018 and 2019 above.

Remember that the Kiddie Tax only applies to unearned income in excess of $2,300. Here’s an illustration of how a child's unearned income in 2022 would be taxed:

  1. $0 - $1,250 isn't taxed
  2. $1,251 - $2,300 is taxed at the child’s tax rate
  3. Over $2,300 is taxed at the parents’ rate (or the child’s rate if it's higher)

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