Should You Pay Kiddie Tax on Unearned Income?

 

Editor’s Note: This post is a fan favorite of our readers. So popular, in fact, that we wanted to make sure it’s updated for you to reflect recent tax changes. Learn more about kiddie tax on a child’s unearned income, after tax changes from the Secure Act.

When you file taxes, you might need to make an adjustment for your child’s unearned income. This is often called the kiddie tax.

Kiddie taxSo, should you pay kiddie tax on unearned income? Here’s the answer: kiddie tax rules apply to unearned income that belongs to a child. It means that if your child has unearned income more than $2,200, some of it will be taxed at estate and trust tax rates (for tax years 2018 and 2019) or at the parent’s highest marginal tax rate (beginning in 2020). Taxpayers can elect to apply the 2020 rules to tax years 2018 and 2019.

The kiddie tax rules apply to any child who:

  • Has more than $2,200 of unearned income
  • Has at least one living parent
  • Doesn’t file a joint return
  • Is required to file a tax return
  • Is one of the following:
    • Under age 18 at year’s end,
    • Age 18 and did not have earned income more than half of their support
    • Over age 18 and under age 24 at year’s end, a full-time student, and did not have earned income more than half of their own support

Unearned Income Tax Rules for Children Subject to Kiddie Tax

You may be able to report a child’s interest and dividend income on either your return or your child’s return. However, if your child has earned income or income from the sale of stock, or any other type of unearned income, the child must file a separate return. Report stock sales on Schedule D.

Even if you are eligible to report your child’s unearned income on your return, you should consider filing a separate return for your child. The disadvantages of reporting your child’s income on your return include:

  • You might have to pay more tax. Adding income to your return could:
    • Limit your IRA deduction
    • Limit your student-loan interest deduction
    • Limit your tuition and fees deduction
    • Reduce the amount of itemized deductions, including medical expenses
  • Your adjusted gross income (AGI) might increase, which:
    • Could affect your eligibility for certain credits. These credits include:
      • American Opportunity Credit
      • Lifetime Learning Credit
      • Earned Income Credit (EIC)
      • Child and dependent care credit
    • Could lead you to pay the Alternative Minimum Tax (AMT) or increase the amount of AMT you owe
  • You can’t claim deductions on your return that your child would be eligible for if they had filed a separate return.

It also might be better to file a separate return for your child if your child:

When you report your child’s interest and dividend income on your return, file Form 8814 with your return. If your child files their own return and the kiddie tax applies, file Form 8615 with the child’s return.

Reporting Tax on a Child’s Unearned Income Using Form 8814 or Form 8615

There are a lot of things to consider about kiddie tax when deciding if your child’s income should go on their return or yours.

This also impacts whether you’ll need to use Form 8814 or Form 8615. First, you might want to check if you even can include your child’s income on your return.

You can include your child’s unearned income in your return in 2019 if:

  • Your child’s age was either:
    • Under age 19 at the end of the tax year, or
    • Under age 24, if they were a full-time student
  • Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).
  • The child’s gross income was less than $11,000.
  • The child would be required to file a tax return for the year if you didn’t make the election.
  • The child doesn’t file a joint return for the tax year
  • Under your child’s name and Social Security number (SSN), you didn’t:
    • Make an estimated tax payment for the tax year
    • Apply a prior year overpayment to the current tax year
  • No federal income tax was taken out of your child’s income under backup withholding rules.
  • If you’re not filing jointly with your child’s other parent, you’re the parent whose tax rate would be used to determine the kiddie tax.

That answers if you can include your child’s income. But how much unearned income is subject to tax? Here’s when you should report your child’s unearned income on your return:

  • If your child’s income is $1,100 or less, you don’t need to pay tax on the income on either your child’s return or your own return because of the child’s standard deduction.

If your child received more than $1,100 in income, the excess is subject to tax. If you elect to report unearned income on your tax return, the tax rate on the child’s income between $1,100 and $2,200 is taxed at a 10% rate.

Kiddie Tax Rules: More Than Unearned Income?

Unearned income is any income that isn’t earned income for purposes of the foreign earned income exclusion.

Earned income for this purpose means:

  • Wages
  • Salaries
  • Professional fees
  • Other amounts your child received in exchange for personal services

Unearned income for the purpose of the kiddie tax rules includes:

  • All taxable interest
  • Ordinary and qualified dividends
  • Capital gains from sales
  • Capital gain distributions
  • Rents
  • Royalties
  • Taxable social security benefits
  • Pension and annuity income
  • Taxable scholarship and fellowship grants not reported on the child’s W-2
  • Unemployment compensation
  • Alimony
  • Income (other than earned income) received as the beneficiary of a trust
  • Any other income that isn’t earned income

Where to Go for Tax Help for Your Child’s Unearned Income?

For tax help on your child’s unearned income and to see if you need to worry about kiddie tax, visit www.hrblock.com. Learn about the many ways to file, and know, whether it’s in person, or working with a tax pro virtually, we have your back!

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