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How Children are Taxed

Children are subject to income taxes just like their parents.  However, there are some special rules that apply and some of them can get complicated.  This is commonly called the “Kiddie” Tax.  This article provides some general information, but you may want to consult your tax advisor to better understand how your children are being taxed. 

The General Rule

Generally, children are treated as separate taxpayers and their income is taxed at the same marginal rates as their parents.  The tax table used to calculate their tax is the single filer table.  The lowest rate is 10% and the rates rise to 37% (for 2022) for the highest levels of income. 

Special Rules

These rules will apply to children under the age of 18 and full-time students under the age of 24. If the child's unearned income, is more than Kiddie Tax threshold, then the child must pay tax on any unearned income over the threshold. 

To calculate the kiddie tax, you first want to know what the child's taxable income is:

Child’s Net Earned Income + Child’s Net Unearned Income – Child’s Standard Deduction = Child’s Taxable Income

The first $1,250 of a child’s unearned income is tax-free, and the next $1,250 is subject to the child’s tax rate. Any additional earnings above $2,500 are taxed at the greater of the child’s or the parents’ tax rate.

The standard deduction for a child is the greater of $1,250, or the sum of $400 plus their earned income, if you claim the child as a dependent. Otherwise, a single filers standard deduction would be $13,850.

This rule was enacted to prevent families from shifting large amounts of investment income to children to avoid having it taxed at the parent's higher rates.

The Really Complicated Rules

The interaction between the Kiddie Tax and the parents' tax situation can become very complicated if the parents have an unusual tax issue like the Alternative Minimum Tax or relatively large amounts of capital gains. In those cases, a qualified tax advisor is a must. 

For More Information

To find out more about tax rules for children, refer to Topic no. 553: Tax on a child's investment and other unearned income (Kiddie tax) and be sure to consult a trusted tax professional with any questions.