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Understanding the "Kiddie Tax"

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For something whose nickname sounds so innocent, the “kiddie tax” certainly can wreak havoc on unprepared taxpayers’ yearly returns.

Congress first introduced the kiddie tax as part of the Tax Reform Act of 1986 to discourage wealthy parents from sheltering their investment income in accounts under their children’s names, thereby avoiding paying taxes on the amounts. The rules have been tweaked periodically ever since.

Although the kiddie tax once applied only to the unearned income of children under 14 (hence the nickname), it now impacts all children under age 19 (as well as full-time students under 24), provided their earned income does not exceed half of the annual expenses for their support.

Moreover, the kiddie tax is not just a wealthy person’s problem: Any outright gifts parents or grandparents bestow on young children, whether to avoid triggering the gift tax, or simply out of generosity, could actually be generate investment earnings that would be subject to the kiddie tax if they exceed a threshold amount.

Here’s a primer on how the kiddie tax works and whom it impacts:


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