Kiddie Tax

What is the kiddie tax?

A child who is a dependent of their parents will pay taxes at the child tax rate if they only have unearned income between $850 and $1,700 (for 2006).

If a child under age 14 has more than $1,700 (2006) in unearned income that income may be taxed at the parent's marginal tax rate instead of the child's tax rate. This is known as the kiddie tax. This prevents parents from reducing the tax on investment income by transferring assets to their children.

The "kiddie tax" does not apply to:

• A child 14 or over at the end of the year.
• A child under 14 who has unearned income of $1,700 (for 2006) or less.
• A child under 14 if neither parent is alive.

Unearned income includes investment type income such as interest, dividends and capital gains and other items such as Social Security benefits and trust income.

For more information see IRS Publication 929 - Tax Rules for Dependents and Children.