Kiddie tax was first heard of when it was a part of the massive 1986 Tax Reform Act. It basically suggested that for the next 20 years, any income that was not earned by the child above a certain limit and who is below the age of 14, would be taxed at the same rate as his or her parents. The 2005 Tax Increase Prevention and Reconciliation Act increased the scope of the tax. According to the Internal Revenue Service, a child’s unearned income is income on investments that include interest, capital gains, and dividends.
If the child happens to have $2000, he or she already qualifies to become a taxpayer. The reason for the inception of kiddie tax was to discourage parents from hiding their income by putting investment accounts in the name of their children. The government had realized back in 1986 that it was losing a significant amount of revenue arising from tax; so it decided to create the kiddie tax for more transparency in the economy.
A child’s investment can be reported by parents on their own income tax returns, or they would have to file separate tax returns for their child. The government has ruled that the first $1000 is free of being taxed, while the next $1000 is charged as per the child’s income tax rate. Any amount totalling more than $2000 will be charged as per the parent’s income tax rate.
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In 2006, the age limit for the kiddie tax was set at 14 and below. However in 2013, the limit was upped to 19 and below. The government also ruled that the kiddie tax applied to 24-year-old college students who are studying full time and haven’t earned a single penny in terms of income from a job.
As a solution to avoid this kind of tax and situation, the onus lies with the parents to encourage and teach children to invest in buy-and-hold stocks that can assist them in saving money until they are 18. Since the child can still make wages, they can invest that sort of money in shares such as growth stocks that won’t earn them any income until they are sold, which should only happen after the child turning 18.
There are other factors in this as well that have got to be considered. If a parent creates an investment stream or account in their child’s name, chances are heavy that financial aid won’t be easily available for the family. Should the child then gain a full scholarship or opt to not go and study in college altogether, any amount of money that has been put under their name becomes their property upon reaching your state’s maximum age of majority.
With tax rules evolving on a constant basis, financing a child’s education has become a tougher task than before. Therefore, saving at least $250,000 for college is crucial since the government is unlikely to increase funds for college education any time soon.
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