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Navigating Kiddie Tax Complexities: Learn How to Calculate and Reduce Your Liability

Kiddie Tax Calculations and Reductions
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Understanding the Kiddie Tax

The Kiddie Tax is a tax imposed on the unearned income of children under the age of 19, or 24 if the child is a full-time student. The tax was created to prevent parents from transferring income-producing assets to their children in order to take advantage of the lower tax rates that apply to children.

The Kiddie Tax applies to unearned income, such as interest, dividends, and capital gains. It does not apply to earned income, such as wages and salaries. The tax rate for the Kiddie Tax is the same as the tax rate that applies to trusts and estates.

How to Calculate the Kiddie Tax

Calculating the Kiddie Tax can be complicated, so it’s important to understand the rules and regulations that apply. Here’s a quick overview of how to calculate the tax:

  • First, calculate the child’s unearned income for the tax year.
  • Next, calculate the child’s taxable income by subtracting any deductions and exemptions from the unearned income.
  • Then, calculate the tax due by applying the tax rate that applies to trusts and estates.
  • Finally, subtract any tax credits from the amount of tax due.

How to Reduce the Amount You Owe

There are several ways to reduce the amount of Kiddie Tax you owe. Here are a few tips to help you minimize your tax liability:

  • Invest in tax-advantaged accounts. Investing in tax-advantaged accounts, such as a 529 plan or a Coverdell Education Savings Account, can help reduce the amount of tax you owe on your child’s unearned income.
  • Take advantage of tax credits. There are several tax credits available to help reduce the amount of tax you owe on your child’s unearned income. These include the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit.
  • Invest in tax-free bonds. Investing in tax-free bonds can help reduce the amount of tax you owe on your child’s unearned income. Tax-free bonds are bonds issued by state and local governments that are exempt from federal income tax.
  • Gift assets to your child. Gifting assets to your child can help reduce the amount of tax you owe on their unearned income. However, you should consult a tax professional before gifting assets to ensure that you are taking advantage of all available tax benefits.

Conclusion

The Kiddie Tax can be a complicated and confusing tax to understand. By following the tips outlined above, you can reduce the amount of tax you owe on your child’s unearned income. However, it’s important to consult a tax professional to ensure that you are taking advantage of all available tax benefits.

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