Kiddie Tax
Encyclopedia
The kiddie tax rule exists in the United States of America and can be found in Internal Revenue Code § 1(g), which “taxes certain unearned income of a child at the parent’s marginal rate, no matter whether the child can be claimed as a dependent on the parent’s return.”
federal income tax
system is progressive, meaning, the higher the income the higher percentage of that income is paid to the government in the form of a tax. The progressivity of the income tax system encourages income shifting, which is the shifting of income from individuals in high tax brackets to others in lower tax brackets.
Taxpayers, however, will not likely shift the income to just any person, but may be willing to shift income to a close family member or friend. Children are usually in a lower tax bracket than their parents and grandparents, which makes them the likely receiver of the shifted income. The incentive, however, to shift income from the taxpayer to the taxpayer’s child is reduced by §1(g) of the Internal Revenue Code.
(1) the child has not reached age 18 by the end of the taxable year;
(2) the child has not reached age 24 and whose earned income is not more than one-half the personal exemption;
(3) the child is required to file a return for the year;
(4) the child has at least one parent alive at the close of the taxable year; and
(5) the child will not file a joint return for the taxable year.
It is also important to remember that the kiddie tax provision only applies to unearned income. Earned income, defined in §911 (d)(2), is exempt from the kiddie tax provision.
Sec. 1(g)(4)(A) provides the formula for computing a child’s “net unearned income,” which is the child’s unearned income minus either (1) two times the standard deduction allowed to dependents under §63(c)(5)(A) or (2) that deduction plus the itemized deductions directly connected with the production of the unearned income.
Under §1(g)(3)(A), the tax rate applied to the net unearned income is the difference between the parent’s applicable tax rate and the tax rate that would have applied had the child’s unearned income
been added to the parent’s income.
It is important to note that Congress has expanded the kiddie tax provision for 2008 and subsequent years. Starting in 2008 the kiddie tax provision will apply to dependents
under 19 and dependent full-time students under 24. To qualify, those ages 19 to 23 who are full-time students must have earned income that is less than 50 percent of their support.
Background
The United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
federal income tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
system is progressive, meaning, the higher the income the higher percentage of that income is paid to the government in the form of a tax. The progressivity of the income tax system encourages income shifting, which is the shifting of income from individuals in high tax brackets to others in lower tax brackets.
Taxpayers, however, will not likely shift the income to just any person, but may be willing to shift income to a close family member or friend. Children are usually in a lower tax bracket than their parents and grandparents, which makes them the likely receiver of the shifted income. The incentive, however, to shift income from the taxpayer to the taxpayer’s child is reduced by §1(g) of the Internal Revenue Code.
Eligibility
Under §1(g)(2), the kiddie tax applies to a child if:(1) the child has not reached age 18 by the end of the taxable year;
(2) the child has not reached age 24 and whose earned income is not more than one-half the personal exemption;
(3) the child is required to file a return for the year;
(4) the child has at least one parent alive at the close of the taxable year; and
(5) the child will not file a joint return for the taxable year.
It is also important to remember that the kiddie tax provision only applies to unearned income. Earned income, defined in §911 (d)(2), is exempt from the kiddie tax provision.
Sec. 1(g)(4)(A) provides the formula for computing a child’s “net unearned income,” which is the child’s unearned income minus either (1) two times the standard deduction allowed to dependents under §63(c)(5)(A) or (2) that deduction plus the itemized deductions directly connected with the production of the unearned income.
Under §1(g)(3)(A), the tax rate applied to the net unearned income is the difference between the parent’s applicable tax rate and the tax rate that would have applied had the child’s unearned income
Unearned income
Unearned income is a term in economics that has different meanings and implications depending on the theoretical frame. To classical economists, with their emphasis on dynamic competition, income not subject to competition are “rents” or unearned income, such as incomes attributable to...
been added to the parent’s income.
It is important to note that Congress has expanded the kiddie tax provision for 2008 and subsequent years. Starting in 2008 the kiddie tax provision will apply to dependents
Dependant
This article is related to law. For the personality trait, see Dependent Personality DisorderA dependant or dependent is a person who relies on another as a primary source of income...
under 19 and dependent full-time students under 24. To qualify, those ages 19 to 23 who are full-time students must have earned income that is less than 50 percent of their support.
See also
- Taxation in the United StatesTaxation in the United StatesThe United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
- Income tax in the United StatesIncome tax in the United StatesIn the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
- Internal revenue codeInternal Revenue CodeThe Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
- Internal Revenue ServiceInternal Revenue ServiceThe Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...