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Passive income calculator4/11/2023 Custodial accounts used for college savings may be converted to custodial 529 plan accounts to take advantage of the tax benefits. Investment earnings in other custodial accounts, however, are subject to the Kiddie Tax. Distributions are completely tax-free when the funds are used to pay for qualified higher education expenses. Contributions are made with after-tax dollars, and any interest earned on the investment grows tax-deferred. 529 plans are investment accounts designed to help individuals save for college. Interest earned on 529 plans and custodial 529 plan accounts is not subject to the Kiddie Tax. Are 529 Plan Earnings Subject to the Kiddie Tax? If a child’s unearned income is less than $12,950 and greater than $1,150, the child’s unearned income can be included on their parent’s income tax return. A separate tax return must be filed for children who have unearned income that is greater than $12,950 or any amount of earned income. Income produced by custodial accounts under the Uniform Gifts to Minors Act (UGMA)įamilies who have unearned income that is subject to the Kiddie Tax must file IRS Form 8615 with their federal tax return.Income produced by gifts from grandparents.Income from wages, salary, tips or self-employment is not subject to the Kiddie Tax. Another exception is for children who file tax returns as married filing jointly. An exception to the Kiddie Tax is a child with earned income totaling more than half the cost of their support. The Kiddie Tax applies to dependent children who are younger than 19 years old, or who are full-time students who are between the ages of 19 and 23. For the tax year 2023 these thresholds are $1,250 and $2,500. In response to the backlash, Congress included a provision in the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) to retroactively revert the Kiddie Tax to the old rules.įor 2022, the first $1,150 of a child’s unearned income qualifies for the standard deduction, the next $1,150 is taxed at the child’s income tax rate, and unearned income above $2,300 is taxed at the parent’s marginal income tax rate. This caused an uproar because of the impact on Gold Star families and scholarships. The Tax Cuts and Jobs Act of 2017 temporarily changed the rules effective with the 2018 tax year, substituting the tax rates that apply to trusts and estates for the parent’s tax rate, making the Kiddie Tax much more expensive for some families. Under the Kiddie Tax, all unearned income above a certain threshold is taxed at the parent’s marginal income tax rate instead of the child’s tax rate. The Kiddie Tax was created as part of the Tax Reform Act of 1986 to prevent parents from shifting income-producing assets into the child’s name to take advantage of the child’s lower tax rate. It can handle your taxes no matter what your situation is, and the best part is that it’s free to file online for simple returns. Most people can’t afford a financial advisor to deal with their taxes. If you’re trying to make sure you get your taxes taken care of correctly, it’s important to make sure you have the right tool. The Kiddie Tax closed this loophole by taxing children’s passive income at higher rates. Parents would gift stocks and other assets to their children, and income earned on the assets would be taxed at the child’s (lower) income tax rate, instead of the parent’s (higher) income tax rate. Before the Kiddie Tax, parents could save on taxes by putting investment accounts in a child’s name. The “Kiddie Tax” is a law that stipulates how investment and unearned income are treated for minors or full-time college students under the age of 24.
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