Here’s what the law used to be: If you have a child under the age of 14 who has unearned income (interest, dividends, capital gains), the income needs to be reported and paid at the parent’s tax rate. That’s called the Kiddie Tax.
Prior to the Kiddie Tax rules, high income/high wealth taxpayers who simply put everything in their kid’s names could take advantage of their lower tax rates. That’s why they came up with this plan. The kids are forced to reporting tax at their parent’s rate.
Then a few years ago, the definition of a “kiddie” went up to 18 years old. Up until that age, a child with unearned income had to pay at their parent’s rate.
Then, in 2008, it got raised again. The Kiddie Tax now applies to full time students who are 19 through 23 whether or not the parent claims the child as a dependent unless the child provides more than half of his support via EARNED income.
The secret of all of this is EARNED income. This is one of the strategies we take into account for our clients with kids. For more information on how we work with clients at DKTaxServices, please give Richard (my husband) a call at 888.592.4769 or drop him an email at Richard@DKTaxServices.com.