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Kiddie Tax: How a Child's Investment Income Gets Taxed

By Imperialpedia Staff

The "kiddie tax" is a rule that taxes a child's unearned income — such as interest, dividends, and capital gains — above a certain threshold at rates associated with trusts and estates, rather than the child's typically lower individual tax rate.

Why This Rule Exists

The rule was created to prevent parents from shifting investment assets into a child's name purely to have that income taxed at the child's lower tax bracket rather than the parents' typically higher bracket. Without this rule, a family could reduce its overall tax bill simply by retitling investment accounts in a child's name.

What Income Is Affected

The kiddie tax applies to unearned income — investment-type income the child didn't work for — not to a child's earned wages from a job, which are generally taxed at the child's own rate regardless of amount. A specific threshold of unearned income is typically taxed at the child's rate before the kiddie tax rules apply to the excess.
IMPORTANT
Families investing on behalf of a child — for example, through a custodial account — should factor the kiddie tax into their planning, since it can meaningfully change the after-tax return on assets held in a child's name once unearned income exceeds the threshold.

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