Kiddie tax and how to get around it

In this post, you will learn

  • How much can save in taxes by offseting investment income to your children.
  • How to get around the Kiddie tax ( also known as the Tax on a Child's Investment and Other Unearned Income)

The kiddie tax applies to :

  • Children under 19
  • Children under 24 going to college

The kiddie tax rate is the following for unearned income:

Unearned income Tax Rate
Less than 1050$ No Tax
1050$ to 2100$ Child tax rate
more than 2100$ Parent's tax rate

IRS rule for children under 24:

The kiddie rule applies even for children under 24 going to college. However, this only applies if the following test is met:

  • Half of income is unearned income (such as stock,dividends). 1

So to get around it, the children needs to have more than half in earned income (such as wages, salaries). Unfortunately, scholarships are excluded.

How to get around it

There are 1 simple solution, is to have your children earn their own money with wages and salaries instead of passive income (such as stock and dividends).

Let's look at an example. Let's say you have 50000$ in assets you want to give to your children. Let's say you have 2 children. The IRS states that you are allowed to give 14000$ per year (in 2016) without a gift tax 3. Therefore you can contribute 28000$ per year to them and generate income tax free.