Kiddie Tax
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Unraveling the Complexity of the Kiddie Tax: A Comprehensive Guide
The Kiddie Tax, instituted in 1986, is a taxation regulation targeting individuals under 18 or dependent full-time students under 24, aimed at curbing tax avoidance strategies involving large gifts of stock to children. This article delves into the intricacies of the Kiddie Tax, its mechanisms, historical evolution, and implications for taxpayers.
Understanding the Kiddie Tax
The Kiddie Tax operates by taxing unearned income exceeding a certain threshold at the parent's marginal tax rate, rather than the child's lower rate, to prevent exploitation of tax loopholes. This threshold determines the amount of income subject to taxation at the child's rate and that taxed at the parent's rate.
Applicability and Scope
As of 2021, the Kiddie Tax applies to children aged 18 and under, as well as dependent full-time students aged 19 to 24. However, it exempts married children filing joint tax returns. The tax encompasses various forms of unearned income, such as interest, dividends, capital gains, rent, and royalties, while excluding earned income like wages and salaries.
Evolution of the Kiddie Tax
Originally limited to children under 14, the Kiddie Tax expanded its scope to cover individuals under 18, addressing concerns of tax evasion through stock gifts to older children. The Tax Cuts and Jobs Act of 2017 temporarily altered the tax rates applied, but subsequent legislation reverted to using the parent's tax rate for calculation, ensuring consistency in taxation practices.