If a dependent child is subject to the kiddie tax and has more than $1,900 of net unearned (investment) income for the year, his or her net unearned income is taxed to the child at the additional rate of tax that the parent would be required to pay if the child’s net unearned income were included in the parents’ taxable income. This applies regardless of the source of the assets creating the child’s unearned income as long as the child has at least one living parent as of the close of the tax year and does not file a joint return.
Custodial Parent Income
The income of the custodial parent is used for the tax computation in the case of parents that are not married. The parent with the greater taxable income is to be used when married parents file separately.
The kiddie tax applies in the following circumstances:
1. Seventeen years of age or younger – Subject to the kiddie tax regardless of the amount of his or her earned income.
2. Eighteen years of age – Subject to the kiddie tax unless the child has earned income exceeding one half or their support
3. Nineteen to twenty three years of age and full time student – Subject to the kiddie tax unless the child has earned income exceeding one half of their support.
Net unearned income is unearned income (such as interest, dividends, capital gains, and certain trust income) less the sum of $950 (referred to as the first $950 clause) and the greater of: (1) $950 of the standard deduction or $950 of itemized deductions, or (2) the amount of allowable deductions which are directly connected with the production of unearned income.
Thus, unearned income is reduced by $1,900 unless the child has itemized deductions connected with the production of unearned income exceeding $950. The amount of net unearned income cannot exceed taxable income for the year.