Your Taxes: Know the Kiddie Tax rules
I mentioned the Kiddie Tax in my last article, and feel that it bears more clarification because it affects more and more families each year. A few years ago, capital gains tax laws changed and it became a strategic move to shift income from parents to their children to tax advantage of better capital gains rates. Most taxpayers pay 15% tax on any long-term capital gains, the exception being that as of 2008, taxpayers in the 10% and 5% tax brackets only pay 0% on any long-term capital gains. As a result, many taxpayers gifted appreciated stocks to their young children who could then sell the stock and pay the capital gains tax the low rate of 0%.In response to this income shift, the Kiddie Tax aims to tax children at their parent’s highest marginal tax rate depending on the child’s age and income levels. The Kiddie Tax basically states that if a child makes more than a certain amount of unearned income ($1,900 in 2010), that income must be taxed at the parents’ tax rate, not the child’s. In the past, this applied to children up to age 14. In 2006, the age limit was raised from 14 to any child who reached age 18 by the end of the year. In 2008, the rules grew more complex and those rules remain in place today. The new Kiddie Tax rules apply to all children under age 18 at year end, or those under age 24 if a full-time student whose earned income wasn’t more than half of his or her support. To determine if your college student is subject to the kiddie tax, you need to add up their support, including lodging, food, clothing, recreation, transportation and education) and see if their income is more than 50% of that amount. In determining the value of lodging, you should figure out a fair market rental value of your house/utilities, and assign your child a percentage of that value, such as 25% for a 4-person family.If you determine that your child is subject to the Kiddie Tax rules, you need to calculate their taxes in a more complicated manner than you would otherwise. One method is to attach Form 8814 to your return. You can use Form 8814 if the child’s income is between $950 and $9,500 from interest, dividends and capital gains distributions. Using Form 8814, the child’s income taxes are added to the parent’s return. If the child has other sources of income, such as the sale of stocks reported on Form 1099-B, then you must file a separate return for the child and attach Form 8615 to that return. Form 8615 requires you to enter amounts from the parent’s individual return, and then calculates the child’s tax based on their parent’s tax rate. With either method, some of the child’s income will be taxed at the child’s lower rate, while the rest is taxed at the parent’s higher rate.While it may always seem easiest to simply add your child’s income to your own tax return, this is not always the best situation because you may benefit from the first $1,900 of income being taxed at the child’s lower tax rate, or because there is a legal requirement to file a return in the child’s name, especially in the case of stock sales. It’s worth a little extra research to be sure that you’re filing your taxes both correctly, and to your benefit!Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
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