KIDDIE TAX
Back to GlossaryDefinition
The income tax imposed on the unearned income (dividends, interest) in excess of an annual exemption, on a child under age fourteen. The tax on the excess income is imposed at the parent’s highest tax rate
Summary
The Kiddie Tax is a special tax rule designed to prevent wealthy parents from shifting investment income to their children to take advantage of lower tax rates. When a child under 14 receives more than a certain amount in unearned income (like dividends from stocks or interest from savings), the excess amount is taxed at the parent's higher tax rate instead of the child's lower rate. This rule ensures that families can't avoid paying higher taxes simply by putting investments in their children's names.
Usage Context
Understanding the Kiddie Tax is important when studying family tax planning strategies, tax avoidance rules, and how the tax system prevents wealthy families from exploiting lower tax brackets through income shifting to minor children.
Common Confusions
- Thinking the Kiddie Tax applies to all income a child receives, not just unearned income
- Believing the entire amount of unearned income is taxed at the parent's rate, rather than just the excess above the exemption
- Confusing the age limit - assuming it applies to all minors rather than just those under 14
- Not understanding that this is meant to prevent tax avoidance strategies
