Kiddie Tax Eligibility Rules

If you are a parent who has gifted stocks or investments to your children, those gifts may be subject to the kiddie tax. The kiddie tax is a tax made on investment income at either the parent’s rate or the child’s rate. Essentially, the tax is on income other than earned income. The tax came about because persons of wealth would transfer investments to children in order to save money by being taxed at the child’s rate.

Eligibility

The kiddie tax rules set forth simple criteria in order for the investments or gifts to be taxed:

  • Children must be under 18 years old; 18 years old with earned income that is not half their support; or between 18 and 24 years old, full-time students and with earned income that is not half their support.
  • Earned income or self-employment pay is not factored into the tax.
  • The unearned income must be in excess of the maximum annual amount.
  • Tax is applicable only to investment income such as interest payments, dividend payments or stock dividends.

Alternative

If you want to provide investment to your children without being subjected to the kiddie tax, look into savings bonds or custodial accounts.