Thread: How to Navigate the “Kiddie Tax”

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  1. #1

    Default How to Navigate the “Kiddie Tax”

    Shifting assets and income to your children and grandchildren can provide many benefits, including tax benefits.

    That’s why Congress set up hurdles to keep you from enjoying all the potential tax benefits.

    When planning gifts of investments to your loved ones, be aware of the “Kiddie Tax.” This tax was created in 1986 to reduce a strategy known as income splitting.
  2. #2


    That’s when someone in a high tax bracket transfers income to a loved one in a lower tax bracket, usually by giving an investment asset.

    The loved one receives investment income, or sells the asset for a capital gain, and pays taxes at a lower rate. The money stays in the family, but there’s more of it left after taxes.
  3. #3


    At first, the “Kiddie Tax” applied only to children under age 14. It was expanded to cover almost all children under age 18, and full-time students up to age 24 who can be claimed as dependents on a parent’s tax return.

    There are other situations when it applies. Read the instructions for Form 8615 carefully. (Yes, the “Kiddie Tax” has its own tax form.)
  4. #4


    In addition, the next $1,050 of investment income (also indexed for inflation) is taxed at the youngster’s tax rate. Note that only the amount of investment income matters, not how the child acquired the investment assets.

    So, only after the child or grandchild has more than $2,100 of investment income in 2016 does the “Kiddie Tax” kick in, and Form 8615 doesn’t have to be filed until the youngster’s unearned income exceeds $2,100.

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