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How to Apply For Kiddie Tax & What to Know About it

How to Apply For Kiddie Tax & What to Know About it

The kiddies tax law started in 1986 to prevent parents from hiding taxable funds under their children's names. Parents were fond of transferring money to their kids' accounts to be taxed at a low rate and reduce tax liability. The situation changed when the first enacted part of the law was in 1987, which stated that children under 14 would experience the same tax rate as their parents, hindering the benefit. 

The rule has been amended several times, in 2018 and 2020. The rules have evolved and now include kids of 18 years and college students between 19 to 24 years old. The restrictions only apply to unearned income received by the child, not salary or wages, which are taxed at a general rate. According to tax rules of 2021, income earned above $2,200 is taxable, and $2,300 for 2022. 

The law applies to kids under 18 and college students from 19 to 24 years of age. The earnings should be more than the typical annual threshold income. Meaning unearned income is taxed at the regular parents' tax rates rather than at lower rates. Parents can no longer escape tax through the loophole of awarding expensive gifts to their kids. 

However, these rules do not apply to kids under the ages but married and file their taxes as joint tax returns. The kiddies tax law is leveraged on unearned income such as interest, capital gains, royalties, gains, and dividends.


How to apply

You need no application to enter the system. However, you've to file your taxes according to Schedule 8812 (Form 1040 or 1040A, on the Child Tax Credit website. The IRS will calculate your taxes through the provided information to verify if you qualify for the scheme. 

The system will automatically register you for advance payment if you are eligible. No extra effort is needed to get an advance payment. You must provide your details to the IRS or file a tax return to receive the Child Tax Credit form for further information.

How to Avoid Kiddie Tax

Only a plan can help you avoid kiddie tax laws. The first way is to maintain a low-income investment in your child with an earning below $1,100. They still benefit from a significant decrease for an amount over $1,100 but return to the normal rate when it reaches $2,200. Another way is to minimize your tax debt and implement some financial planning.

Some parents evade these rules by saving up for college. Although there are no contribution deductions, the child will enjoy tax-free college expenses. There is the opportunity to open a Roth IRS account. This account is considered a retirement account and withdrawing from such an account is tax-free.


What Are the Rules?

The rules vary on the difference between the earned and unearned income of the child. Kiddies with over $12,400 earnings are to file an individual tax return, but the parent or guardians are allowed to file the taxes if it is an unearned income and is below $11,000. These earnings can be from capital gains, interests, dividends, etc. they are to use Form 8814 to report their taxes. Here are some ground rules to follow.

  • The tax applies to kids under 18 years.

  • It applies to full-time students between the ages of 19 to 24

  • The tax does not apply to the first unearned income of $1,100

  • The next unearned $1,100 is taxed at the kid's income tax rate

  • Kids earning over $2,200 is taxable at the parent's tax rate

  • Kids may be asked to fill in other tax-related earnings besides unearned income.