The term kiddie
tax was introduced by the Tax Reform Act of 1986. The rules are intended to
keep parents from shifting their investment income to their children to have it
taxed at their child's lower tax rate. In 2022 the law requires a child's
unearned income (generally dividends, interest, and capital gains) above $2,300
be taxed at their parent's tax rate. That amount is broken out as follows:
The excess over $2,300 is taxed at the parent's rate. So how can you best utilize that $2,300?
· Maximize your lower tax investment options.
Look for gains in your child's investment accounts to maximize the use of your child's kiddie tax threshold each year. You could consider selling stocks to capture your child's investment gains and then buy the stock back later to establish a higher cost basis.
· Be careful where you report a child's unearned income.
Don't automatically add your child's unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.
· Leverage gift giving.
If your children are not maximizing tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child's financial aid when approaching college age years.
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