2018 Kiddie Tax

In order to prevent parents from shifting income from investments to their children who would be in a lower tax bracket, the IRS has devised the kiddie tax. Starting in 2018 the tax rates on such income are based on the the trust rates which get to the highest 37% bracket at only $12,501 and above. It used to be based on the parents top tax rate. There is a threshold for unearned income (interest, dividends, and capital gains) of $2,100. The kiddie tax only applies above the threshold. Kids also get a standard deduction of the greater of $1,050 or earned income (wages) plus $350 not to exceed $12,000. For example, say a child has wages of $2,000 and interest income of $7,000. His standard deduction would be $2,350 and his taxable income would be $6,650. The first $2,100 would be taxed at 10% which is the regular rate for single taxpayers. The next $4,550 would be taxed at the trust rates of 10% on the first 2,550 and the next $2,000 would be at the 24% rate for a total of $735. The total tax bill would be $945 vs a regular tax rate of $665(10%).