Changes to the Kiddie Tax Rule
The age limit for the Kiddie Tax has been increased from 14 to 18 for 2006. The Kiddie Tax now requires children under 18 who have more than a small amount of investment income to pay tax at their parents’ tax rate. The only exception to this rule is married children filing jointly.
The Kiddie Tax was created by Congress to prevent families
from limiting their tax burden by transferring investment assets
to minors and, therefore, paying tax on the investment income
at the child’s lower tax rate. The first $1,700 of investment
income is still taxed at the child’s lower rate, but any additional
investment income is taxed at the parents’ rate.
For Example: In 2006 your child has $5,000 of
interest income and no other income. The first
$850 of investment income is not taxed due to
the child’s standard deduction. The next $850
is taxed at the child’s rate of 10% (or $85). This
leaves $3,300 to be taxed at the parents’ rate.
Let’s assume this to be 28% (or $924). Therefore,
the total federal tax on the $5,000 of interest
income will be $1,009.