The So-Called Kiddie Tax
The so-called Kiddie Tax is simply a term for how income tax is determined on the investment income of a dependent child. Tax on part of a child’s investment income exceeding $1,900 may be determined at the tax rate of the parents. This amount is subject to annual adjustment for the cost-of-living. Therefore, updates are provided in a CPE course each year.
The tax applies to children who are eligible for a living parent to claim as a dependent. Therefore, a child for whom the kiddie tax applies is usually under age 18. But other ages are possible. A child may be exactly age 18 and lack earned income that provides at least one-half of the child’s annual support. Also, a child is subject to the kiddie tax when under age 24 and a full-time student with earned income that doesn’t exceed one-half of annual support.
In addition to child dependency age requirements, continuing education tax courses cover income limits that require someone to file a tax return. The kiddie tax applies only to children who are required to file a tax return. A dependent is not required to file a tax return if investment income and earned income are below certain limits that are adjusted for the cost-of-living. For 2010, a dependent child is not required to file a tax return if investment income is below $950 and earned income is less than $5,700.
Taxpayers whose children have investment income over these limits usually require professional tax assistance. To determine the effect of the kiddie tax, Form 8615 is added to the tax return of the child. Enrolled agent tax work involves assistance in addressing these special taxes. Accurate advice can help taxpayers make changes to avoid the kiddie tax.
The services of enrolled agents also lead to showing taxpayers easier ways to report income and the associated tax. For example, circumstances can affect a child filing a tax return only because of investment income that’s taxed at the rate of parents. In some of these cases the child doesn’t have to file a tax return and the parent can include the child’s income on the parent’s return.
To accomplish this, the child’s investment income must not exceed $9,500. Age restrictions also apply. That is, the child must be under age 19 or a full-time student under age 24. Of course, the child must not have paid any income tax during the year as either withholding or estimated tax payments. Including Form 8814 in the tax return of the parents makes the election for parents to report the investment income of children.
The dollar limits related to the kiddie tax are subject to change annually. In addition, changes in tax laws affect how the tax is applied. Maintaining current knowledge about these facts is accomplished by completing an enrolled agent class.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.