Definition: The Kiddie Tax applies to dependent children with unearned income exceeding $2,600.
Tax Rate: Taxed at the parent's marginal tax rate instead of the child's.
Use the individual income tax formula.
Special Standard Deduction Rules for dependents:
Standard deduction is the greater of $1,300 or earned income + $4.50.
Net Unearned Income = Unearned Income - $2,600
Types of Income:
Earned Income: Wages, self-employment income (active income).
Unearned Income: Interest income, dividends, capital gains (passive income).
Tax net unearned income at the parent's marginal tax rate.
Remaining taxable income taxed at the dependent's tax rate (10% for the first $11,600 in 2024).
Add taxes calculated in Steps B and C to find total federal income tax liability.
Details:
Age: 17
Earned Wages: $4,000
Unearned Investment Income: $3,500
Parents’ Marginal Tax Rate: 35%
Calculate Total Income:
Total Income = Earned Income + Unearned Income = $4,000 + $3,500 = $7,500
Adjusted Gross Income (AGI):
No exclusions or adjustments, AGI = Total Income = $7,500.
Determine Standard Deduction:
Greater of $1,300 or $4,000 + $4.50 = $4,450. Use $4,450.
Calculate Taxable Income:
Taxable Income = AGI - Standard Deduction = $7,500 - $4,450 = $3,050.
Calculate Net Unearned Income:
Net Unearned Income = $3,500 - $2,600 = $900.
Step B - Tax Net Unearned Income:
Tax on Net Unearned Income: $900 * 35% = $315.
Step C - Tax Remaining Income:
Remaining Taxable Income = $3,050 - $900 = $2,150.
Tax on Remaining Income: $2,150 * 10% = $215.
Total Tax Liability:
Total = $315 + $215 = $530.
If unearned income is less than or equal to $2,600, Kiddie Tax does not apply; tax is calculated at the child’s tax rate.
Rate: 0.9% on wages exceeding $200,000 (unmarried) or $250,000 (married filing jointly).
Rate: 3.8%, applies to the lesser of net investment income or modified AGI exceeding thresholds ($200,000 for unmarried, $250,000 for married).
Details:
Wages: $208,000
Net Investment Income: $140,000
AGI: $348,000
Tax only applies to wages above $200,000:
Excess Wages: $208,000 - $200,000 = $8,000.
Additional Medicare Tax: $8,000 * 0.9% = $72.
Compare net investment income vs AGI over $200,000:
Excess AGI: $348,000 - $200,000 = $148,000.
Use lesser amount ($140,000).
Net Investment Income Tax: $140,000 * 3.8% = $5,320.