Caution: Kiddie Tax

Congress put in place the kiddie tax to prevent individuals from putting assets in the names of their children who typically have far lower tax rates than their parents. As Laura Saunders points out in a recent article in the Wall Street Journal, this tax needs to be kept in mind when making gifts to children and grandchildren.

Under this tax, a child’s unearned investment income (interest, dividends and capital gains) which exceeds $2100 (in 2015) is taxed at the parents’ top rate. The tax applies to all children under age 18 and up age 24 if they can be claimed as dependents on the parents’ return.

The first $1050 of a child’s investment income is exempt from tax. The next $1050 of investment income is taxed at the child’s rate, which is usually very low or zero.

The tax does not apply to earned income such as wages from a job.

The kiddie tax does apply to taxable investment income so investing in growth stocks which do not pay dividends can help avoid the tax.

Consult your estate planning attorney for further information.