- Kiddie Tax
The kiddie tax rule exists in the
United States of America and can be found in [http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000001----000-.html Internal Revenue Code § 1(g)] , 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.” [Samuel Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials 639 (Thomson West 2007) (2005).]Background
The
United States federal incometax system is progressive, meaning, the higher the income the higher percentage of that income is paid to the government in the form of a tax. The progressivity of the income tax system encourages income shifting, which is the shifting of income from individuals in hightax brackets to others in lower tax brackets. [Examples & Explanations:Federal Income Tax 431 (Joseph Bankman et al. eds., Aspen 2005) (1955).]Taxpayers, however, will not likely shift the income to just any person, but may be willing to shift income to a close family member or friend. Children are usually in a lower tax bracket than their parents and grandparents, which makes them the likely receiver of the shifted income. The incentive, however, to shift income from the taxpayer to the taxpayer’s child is reduced by §1(g) of the Internal Revenue Code.
History
Eligibility
Under §1(g)(2), the kiddie tax applies to a child if:
(1) the child has not reached age 18 by the end of the taxable year;
(2) the child’s investment income was more than $1,700 for 2007;
(3) the child is required to file a return for the year;
(4) the child has at least one parent alive at the close of the taxable year; and
(5) the child will not file a joint return for the taxable year. [Id. at 639-640.]It is also important to remember that the kiddie tax provision only applies to unearned income. Earned income, defined in §911 (d)(2), is exempt from the kiddie tax provision.
Sec. 1(g)(4)(A) provides the formula for computing a child’s “net unearned income,” which is the child’s unearned income minus either (1) two times the standard deduction allowed to dependents under §63(c)(5)(A) or (2) that deduction plus the itemized deductions directly connected with the production of the unearned income. [Id. at 640.]
Under §1(g)(3)(A), the tax rate applied to the net unearned income is the difference between the parent’s applicable tax rate and the tax rate that would have applied had the child’s
unearned income been added to the parent’s income.It is important to note that Congress has expanded the kiddie tax provision for 2008 and subsequent years. Starting in 2008 the kiddie tax provision will apply to
dependents under 19 and dependent full-time students under 24. [ [http://www.kiplinger.com/features/archives/2007/06/kidtax.html Congress Closes Kiddie-Tax Loophole - Kiplinger.com ] ] To qualify, those ages 19 to 23 who are full-time students must have earned income that is less than 50 percent of their support. [ [http://turbotax.intuit.com/support/kb/personal-income/5268.html The kiddie tax keeps aging - TurboTax Customer Care & Support ] ]Impact
ee also
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Taxation in the United States
*Income tax in the United States
*Internal revenue code
*Internal Revenue Service Notes
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