Unearned Income of Children under Age 18 Taxed @ Parents Rate

Date: Thursday, September 11, 2008
Time: 11 PM
Place: Kitchen

At one time, a dependent child could claim an exemption on his or her own return even if claimed as a dependent by the parents. This enabled a parent to shift investment income to a child by transferring ownership of the assets producing the income. The child would pay no tax on the income to the extent that it was shelted by the child's exemption.
Also, an additional tax motivation existed for shifting income from parents to children. Although a child's uneared income in excess of the exemptiuon amount was subject to tax, it was taxed at the child's rate rather than the parents' rate.
To reduce the tax savings that result from shifting income from parents to children, the net unearned income of certain minor children is taxed as if it were the parents'income. Unearned income includes such income as taxable interest, dividends, capital gains, rents, royalties, pension and annuity income, and income recieved as beneficiary of a trust. This provision, commonly referred to as a kiddie tax, applies to any child for any taxable year if the child has not reached age 18 by the close of the taxable year, has at least one living parent, and has unearned income of more than $1,700.
The kiddie tax does not apply if the child is age 18 or older, or if both parents are deceased, or if the child is maaried and files a joint return.