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. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  2. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  3. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  4. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  5. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  6. Dual Rate Income Tax

    An income tax rate structure in which two different tax rates ...
Related Articles
  1. Taxes

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  2. Taxes

    What All the Candidates’ Tax Plans Are Missing

    The presidential candidates have starkly different tax-reform proposals – but none of them gets to the real problem of America's tax system.
  3. Taxes

    New Taxes Under The Affordable Care Act

    Find out what you need to know about the 21 new tax changes linked to the ACA.
  4. Taxes

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  5. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
  6. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  7. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  8. Taxes

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  9. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  10. Taxes

    What is a Direct Tax?

    Governments and taxing entities impose direct taxes directly on individuals and businesses.
RELATED FAQS
  1. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
  2. How does the effective tax rate for an individual differ from that of a corporation?

    Read about the effective tax rate for individuals when compared with the effective tax rate for corporations, including how ... Read Answer >>
  3. Is progressive tax the same thing as marginal tax rate?

    Learn how a marginal tax rate is a form of a progressive tax rate. Learn the pros and cons of such a tax policy and who may ... Read Answer >>
  4. Do I need to file an income tax return every year?

    Understand if a person needs to file a tax return every year. Learn the benefits of filing a yearly income tax return even ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center