Financial Answer Center
Naturally, you want to minimize taxes in order to keep your hard-earned money from disappearing. Shifting assets to your children (who have a lower tax bracket) is one way to accomplish this.
How do you get the money to your child?
The "Kiddie Tax"
Now that your child has investments in their name, how is the income from these investments taxed?
The answer can be found in the "Kiddie Tax" Rules. This tax was created in 1986 because parents had been putting money in their child's name so that the income earned would be taxed at the child's lower tax bracket rather than at the parent's higher one. To put an end to this, Congress came up with a new set of rules, the key one being that if a child under age 19 or age 24 if a full-time student (the age was 14 prior to 2006 and was age 18 in post 2005 tax years) has unearned income over a certain amount (that amount is adjusted annually), that extra amount is taxed at the parent's marginal federal income tax rate (unearned income is income from investments, such as stocks, bonds, CDs, and savings accounts). Here's how it works:
In 2016 if your child is under age 19 or if a full-time student under age 24 and has unearned income of $1,050 (same in 2015) or less, there is no tax.
If the unearned income is between $1,051 and $2,100 in 2016 (same in 2015) the income is taxed at the child's tax rate.
If your child has more than $2,100 in 2016 (same in 2015) of unearned income per year, he or she will be taxed at your rate, which is probably higher than the child's income tax rate.
Any income your child has that's earned (from working) is taxed at their rate.
Once your child reaches age 19, all of their income is taxed at their rate. IRS Publication has more details on the Kiddie Tax calculations.
Filing Tax Returns for Your Child
When your children have income, they must pay taxes. However, they may not need to file their own tax return. If they are under age 19, or age 24 if a full-time student, and have income of between $1,050 (same in 2015) and $10,500 (same in 2015) consisting only of interest and dividends that were not subject to backup withholding, and they made no estimated payments, you may elect to include the child's income on your return. If you elect to do this, enter their income as "other income" on your return and file Form 8814.
This may boost your taxable income, put you in a higher tax bracket and, therefore, work to your disadvantage; or, it may work to your advantage if you can deduct more investment interest expense because of your child's income inclusion.
If you do not include the child's income on your tax return, then they may be required to file their own return and Form 8615.
Let's summarize:
2016 Form 8814 |
2016 Form 8615 |
|
Parents include Child's Unearned Income |
Child Files Own Tax Return for Unearned Income |
|
Under age 19 or a full-time student under age 24 |
First $1,050 (same in 2015) is tax free |
First $1,050 (same in 2015) is tax free |
$1,051 to $2,100 (same in 2015) taxed at 10%. Dividends and the long-term capital gain portion are taxed at a maximum rate of 0% |
$1,051 to $2,100 (same in 2015) taxed at 10%. Dividends and the long-term capital gain portion are taxed at a maximum rate of 0% |
|
Over $2,100 (same in 2015) is taxed at parents' tax rate |
Over $2,100 (same in 2015) is taxed at parents' tax rate |
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.