The Kiddie Tax: What You Need to Know

2020: The Year of Unemployment

Did your child collect unemployment this year? Your family may be impacted by a lesser-known piece of the Internal Revenue Code aptly labeled the “Kiddie Tax”.

The Kiddie Tax was implemented by the Internal Revenue Code to stop parents from shifting their investment income to their kids to avoid paying their presumably higher income tax rates on that income. Unfortunately, when this tax was set up back in 1986, part of that “unearned” income subject to the Kiddie Tax included unemployment compensation.

If a child (under age 18) had unearned income totaling more than $2,200 (which includes dividends, interest, capital gains, social security, AND unemployment income) then they will be subject to the kiddie tax provisions and their income will be taxed at the parent’s marginal tax rate instead of their usual tax rate. This means even if your child normally receives a tax refund, they may in fact owe money this year.

Those rates are as follows:

Marginal Rates: For the tax year 2020, the tax brackets are:

• 12% for incomes over $9,875 ($19,750 for married couples filing jointly)
• 22% for incomes over $40,125 ($80,250 for married couples filing jointly)
• 24% for incomes over $85,525 ($171,050 for married couples filing jointly)
• 32% for incomes over $163,300 ($326,600 for married couples filing jointly)
• 35% for incomes over $207,350 ($414,700 for married couples filing jointly)
• 37% for incomes over $518,400 ($622,050 for married couples filing jointly)

As always, if you have any questions about these tax laws or anything else, you can contact us.