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Kiddie Tax

Definition

The kiddie tax rule exists in the United States of America and can be found in Internal Revenue Code § 1, 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".

What is 'Kiddie Tax'

A special tax law created in 1986 imposed on individuals under 17 years old whose earned income is more than an annually determined threshold. Any extra income earned above of the threshold is taxed at the guardian's rate.

Explaining 'Kiddie Tax'

This law is designed to prevent parents from exploiting a tax loophole where their children are given large "gifts" of stock. The child would then realize any gains from the investments and be taxed at a far lower rate compared to if the parents had realized the stock's gains.

Originally, the tax only covered children under 14 years of age as they cannot legally work and therefore any income was usually the results of dividends or interest from bonds. However, the tax authorities realized that some parents would take advantage of the situation by giving stock gifts to their older, 16-to-18-year-old children.

As of May 2007, the government is seeking to tighten the kiddie tax to cover individuals under the age of 18 (or under the age of 24 if they are full time students). However, there are some exceptions provided for individuals that work paid jobs.


Further Reading


Income splitting and anti-avoidance legislation: evidence from the Canadian “kiddie tax”
link.springer.com [PDF]
… taxation and the costs of income splitting or income shifting under individual taxation (see LaLumia … children and non-minor children to one another before and after “kiddie tax” legislation … approach is consistent with other empirical studies on the effects of amendments to taxes …

Income splitting and the new kiddie tax: major changes for minor childrenIncome splitting and the new kiddie tax: major changes for minor children
heinonline.org [PDF]
… taxation and the costs of income splitting or income shifting under individual taxation (see LaLumia … children and non-minor children to one another before and after “kiddie tax” legislation … approach is consistent with other empirical studies on the effects of amendments to taxes …

Kiddie Tax Changes Result in Financial Aid Traps: New Law Affects Planning StrategiesKiddie Tax Changes Result in Financial Aid Traps: New Law Affects Planning Strategies
www.questia.com [PDF]
… taxation and the costs of income splitting or income shifting under individual taxation (see LaLumia … children and non-minor children to one another before and after “kiddie tax” legislation … approach is consistent with other empirical studies on the effects of amendments to taxes …

behavioural economicsbehavioural economics
www.elgaronline.com [PDF]
… taxation and the costs of income splitting or income shifting under individual taxation (see LaLumia … children and non-minor children to one another before and after “kiddie tax” legislation … approach is consistent with other empirical studies on the effects of amendments to taxes …

The economic effects of the Tax Reform Act of 1986The economic effects of the Tax Reform Act of 1986
www.jstor.org [PDF]
… taxation and the costs of income splitting or income shifting under individual taxation (see LaLumia … children and non-minor children to one another before and after “kiddie tax” legislation … approach is consistent with other empirical studies on the effects of amendments to taxes …

Kiddie Tax Complexity GrowsKiddie Tax Complexity Grows
www.questia.com [PDF]
… taxation and the costs of income splitting or income shifting under individual taxation (see LaLumia … children and non-minor children to one another before and after “kiddie tax” legislation … approach is consistent with other empirical studies on the effects of amendments to taxes …

The Child's Penalty for Parental Tax Avoidance: The Kiddie Tax Provisions of the Tax Reform Act of 1986The Child's Penalty for Parental Tax Avoidance: The Kiddie Tax Provisions of the Tax Reform Act of 1986
heinonline.org [PDF]
… taxation and the costs of income splitting or income shifting under individual taxation (see LaLumia … children and non-minor children to one another before and after “kiddie tax” legislation … approach is consistent with other empirical studies on the effects of amendments to taxes …



Q&A About Kiddie Tax


What is a tax cut?

A tax cut is a reduction in the rate of tax charged by a government. The immediate effects of a tax cut are a decrease in the real income of the government and an increase in the real income of those whose taxes have been lowered. Due to the perceived benefit in growing real incomes among taxpayers, politicians have sought to claim their proposed tax credits as tax cuts. sup class="noprint Inline-Template Template-Fact" style="white-space:nowrap;" &91; i

How was the Kiddie Tax originally designed to prevent parents from exploiting a tax loophole where their children were given large "gifts" of stock?

The tax was designed to prevent parents from exploiting a tax loophole where their children were given large "gifts" of stock.

What are some examples of how they affect individuals?

Tax cuts can be used to improve individual's personal finances, such as lowering their taxes or increasing their take home pay through lower payroll taxes or higher wages from employers who may use savings from lower taxes to offer higher salaries.

How do they affect the economy?

They boost the economy because they put more money into circulation. This is a good measure for improving the economy in the short term.

What are some of the exceptions provided for individuals who work paid jobs?

There are some exceptions provided for individuals who work paid jobs.

How has the government sought to tighten up the kiddie tax since May 27, 2012?

As of May 27, 2012, the government is seeking to tighten up the kiddie tax by covering individuals under 18 (or 24 if they are full time students). However, there are some exceptions provided for individuals that work paid jobs.

What is the Kiddie Tax?

The Kiddie Tax is a special tax law created in 1986 that imposes taxes on individuals under 17 years old whose earned income is more than an annually determined threshold.

Who does the Kiddie Tax affect?

The Kiddie Tax affects individuals under 17 years old.