Kiddie Tax

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. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  2. Federal Tax Brackets

    Income tax groupings specified by the Internal Revenue Service ...
  3. Dual Rate Income Tax

    An income tax rate structure in which two different tax rates ...
  4. Income Tax Payable

    A type of account in the current liabilities section of a company's ...
  5. Tax Return

    1. The tax form or forms used to file income taxes with the Internal ...
  6. Tax Reform Act Of 1986

    A law passed by the United States Congress to simplify the income ...
Related Articles
  1. Personal Finance

    Understanding Taxes

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

    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. Managing Wealth

    3 Ways To Avoid The Dividend Tax Hike

    Find out how you can offset the potential tax hikes.
  4. Personal Finance

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  5. Personal Finance

    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 ...
  6. Personal Finance

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  7. Personal Finance

    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.
  8. Personal Finance

    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.
  9. Personal Finance

    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.
  10. Personal Finance

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
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. What is the difference between income tax and capital gains tax?

    The conceptual difference between income tax and capital gains tax is that income tax is the tax paid on income earned from ... Read Answer >>
  3. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Trading Center