Children's Taxes

Congress has provided many favorable tax breaks to individuals in recent years. The “kiddie tax” is unearned income over $2,200 for children under age 18 (age 19 if the child does not provide more than one half his/her own support or age 24 for full-time students) is taxed at rates that apply to trusts and estates, not the parents’ top rates as it has in years past.

In 2020, children owe no taxes on the first $1,100 of unearned income and are taxed at their own rate on the next $1,100. Original law applied the kiddie tax to children under age 14. This permitted children 14 and older to file their own returns, allowing their taxable investment income, such as dividends and interest, to be taxed at rates most likely lower than their parents’ top rates.

Even with the increase in age, there are steps you can take to plan around the kiddie tax. To avoid paying the higher rate, consider the following:

  • Shift the child's investments to tax-free securities or growth stocks (which do not pay dividends) that defer taxes until the child is old enough to avoid the kiddie tax.

  • Divide the child's income with a special trust. Only undistributed income is taxed to the trust; distributed income is taxed to the child. At age 21, or when the child satisfies the terms of the trust, the child will receive the principal and accumulated earnings. Be sure to contact us at that time because there may be tax consequences.

The Kiddie Tax went through changes as part of the Tax Cuts and Jobs Act of 2017 and has recently changed again as part of the SECURE Act passed in December 2019. Under the SECURE Act, some of the provisions were shifted back to pre- 2017 law. Currently, unearned income over $2,200 for children under age 18 (age 19 if the child does not provide more than one half his/her own support or age 24 for full-time students) is taxed at the parents’ marginal tax rate, not the rates that apply to trusts and estates as it did in 2018 unless you file an amended return for that year. For 2020 filings, taxpayers will choose which rate approach to use depending on their situation. The rates in 2020 are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.