Kiddie Tax

AAA

DEFINITION of 'Kiddie Tax'

A special tax law created in 1986 imposed on individuals under 17 years old whose earned income is more than an annually determined threshold. Any extra income earned above of the threshold is taxed at the guardian's rate.

BREAKING DOWN 'Kiddie Tax'

This law is designed to prevent parents from exploiting a tax loophole where their children are given large "gifts" of stock. The child would then realize any gains from the investments and be taxed at a far lower rate compared to if the parents had realized the stock's gains.

Originally, the tax only covered children under 14 years of age as they cannot legally work and therefore any income was usually the results of dividends or interest from bonds. However, the tax authorities realized that some parents would take advantage of the situation by giving stock gifts to their older, 16-to-18-year-old children.

As of May 2007, the government is seeking to tighten the kiddie tax to cover individuals under the age of 18 (or under the age of 24 if they are full time students). However, there are some exceptions provided for individuals that work paid jobs.

RELATED TERMS
  1. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  2. Bond

    A debt investment in which an investor loans money to an entity ...
  3. Dividend

    A distribution of a portion of a company's earnings, decided ...
  4. Income Tax

    A tax that governments impose on financial income generated by ...
  5. Income Shifting

    A strategy of moving a person's income from a high income bracket ...
  6. Head Of Household

    A status held by the person in a household who is running the ...
Related Articles
  1. Savings

    Don't Forget The Kids: Save For Their Education And Retirement

    Retirement and education financing are the two most important planning items for taxpayers.
  2. Taxes

    How To File Your Child's First Income Tax Return

    Use this quick parental guide to help your child learn the tax filing process and establish good habits.
  3. Budgeting

    Teaching Your Child To Be Financially Savvy

    If you start today, you can set your kids up for a lifetime of smart money management.
  4. Budgeting

    Kids Or Cash: The Modern Marriage Dilemma

    It now costs nearly $300,000 to raise a child for 18 years. Are you sure you're up for it?
  5. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  6. Taxes

    Late with Your Taxes? Grab IRS Form 4868

    Fill out this form to get a few more months to file your tax return. But remember, April 15 is still the payment due date if you owe taxes.
  7. Taxes

    What's a Tax Shield?

    A tax shield is a deduction, credit or other means used to reduce the amount of taxes an individual or business owes to the government.
  8. Taxes

    What's an Indirect Tax?

    An indirect tax is levied on goods or services rather than on an individual or a company.
  9. Taxes

    Understanding Excise Taxes

    An excise tax is an indirect levy charged for the sale or use of a particular item.
  10. Taxes

    Understanding the W-2 Form

    The W-2 Form is a standard Internal Revenue Service (IRS) form that employers are required to furnish employees at the end of each year.
RELATED FAQS
  1. What is the difference between comprehensive income and gross income?

    Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
  2. What tax breaks are afforded to a qualifying widow?

    The tax breaks accorded to qualifying widows or widowers include being able to use a tax filing status that allows for a ... Read Full Answer >>
  3. How is income taxed on prorated salary?

    Since yearly income is viewed by the Internal Revenue Service (IRS) as the total amount of income a person has made over ... Read Full Answer >>
  4. How can I tell which of my business expenses count as write-offs?

    Any basic, reasonably necessary expenses incurred in running a business can be considered possible write-offs. Such expenses ... Read Full Answer >>
  5. What is the difference between a write-off and a deduction?

    There is no difference between a tax write-off and a tax deduction. It's possible that the confusion arises between a tax ... Read Full Answer >>
  6. What is the difference between taxable income and gross income?

    Gross income includes all of the income a person receives during a year that is not explicitly exempt from taxation, whereas ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Depreciation

    1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both ...
  2. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  3. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  4. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  5. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  6. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!