A tax for children with unearned income
The kiddie tax is a type of federal income tax that children must pay if they have unearned income, such as from interest and dividends, that is above a certain threshold. For 2020 income taxes, the threshold is $2,200 and applies to children under age 19 — or under age 24, if a full-time student.
Depending on how much income the child has, the child’s parent or guardian can either elect to include the child's income on their tax return, or the child can file their own return. (For minor children, a parent should file the return on the child’s behalf). Keep in mind that if a child has earned income, like from wages and salaries, they likely need to file their own tax return regardless of the kiddie tax.
No matter how it’s filed, the 2020 kiddie tax is determined according to the marginal tax rate of the child’s parents. This differs from 2019 and 2018, when the kiddie tax was determined according to the tax rates of trusts and estates.
Kiddie tax generally applies to a child who can be claimed as a dependent and has unearned income over $2,200
A parent can elect to report their child’s income on their tax return in many cases
A child must file their own tax return if their unearned income is more than $11,000
The tax form you need depends on how you file: Use Form 8615 if the child is filing and Form 8814 if a parent is reporting the child’s income
The kiddie tax is a tax for certain children who have unearned income of at least $2,200 during the tax year. It was created to close a tax loophole that allowed parents to move income to their children in order to pay lower income tax rates. The exact kiddie tax rules have been updated many times so it’s important to check the most recent tax laws before filing.
For 2020 taxes, kiddie tax is necessary for any dependent child who is 18 or younger and has unearned income of more than $2,200. Kiddie tax also applies to children age 23 or younger if they are full-time students whose parents can still claim them as dependents. When determining a child’s eligibility, use their age on the last day of the tax year (December 31).
A child within those age ranges does not have to pay kiddie tax if they are married and file a joint return. Children who are 18 years old also aren’t subject to the kiddie tax if they have earned income worth at least half of their support costs — housing, food, clothing, etc.
Learn more about who qualifies as a dependent.
Unearned income generally includes any taxable income that isn’t from wages or salaries. The following are all considered unearned income when determining kiddie tax:
Capital gains and capital gain distributions
Pension and annuity income
Taxable scholarships and fellowship grants not reported on Form W-2
Taxable Social Security benefits
Unearned income of any type that was received as a trust beneficiary
How much you pay for kiddie tax depends on two main factors: how much unearned income the child has, and whether the child is filing a tax return or a parent is electing to include the child’s income on their tax return.
The first $1,100 of a child’s unearned income is untaxed (because even if the child files a return, the standard deduction for a child is $1,100.  )
The next $1,100 is taxed in one of two ways:
If the parent elects to include the child’s income on their return, that $1,100 is taxed at a 10% rate and the maximum tax on this income is $110. 
If the child is filing their own return, unearned income between $1,100 and $2,200 is taxed according to the child’s tax rate, which may be 0% if the income is from dividends or long-term capital gains. (Income from dividends and capital gain distributions can be taxed according to the capital gains rate, which is 0% for incomes up to $40,000 in 2020. For other types of income, the regular income tax rates start at 10% for the first $9,875 of income in 2020.)
A child’s unearned income over $2,200 is taxed according to their parent’s top marginal tax rate.
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There are two ways to report kiddie tax on a federal tax return:
A child can file their own tax return and complete IRS Form 8615, which has three parts that walk through how to calculate your kiddie tax. If the child is a minor, a parent or guardian should complete the necessary tax forms on behalf of the child. 
A child’s parent can elect to include the child’s income on their tax return by completing IRS Form 8814. This option isn’t available if the child’s unearned income is more than $11,000.
The key benefit of having a parent opt to include a child’s income on their tax return is that it can simplify a family’s tax situation. A separate return for a young child means filling out more forms and probably paying higher prices to file (whether you file online or with an accountant). However, if the child has earned income and must file a tax return anyway, including unearned income on their tax return may be simpler than reporting it on a parent’s return.
Having a child file their own tax return can sometimes result in lower overall taxes, too. For example, a child could itemize deductions if they have them (such as for charitable contributions). A child could claim an additional standard deduction of $1,650 if they’re blind. A child is also eligible to pay capital gains rates on their unearned income between $1,100 and $2,200 (if they have dividend or capital gains income). This would likely mean a 0% tax rate, but a parent would need to pay a flat rate of 10%. Additionally, if a parent files and the child has investment income, it’s added to the parent’s overall investment income, which could push the parent closer to the threshold for paying a 3.8% net investment income tax (NIIT). See IRS Topic No. 559 for more information on NIIT.
If you’re unsure which filing option you should choose, you may want to go through the process using both to see which results in less tax. For more help deciding which method is best for you, speak with a tax professional.
The Tax Cuts and Jobs Act of 2017 changed the kiddie tax rules so that for 2018 and 2019, the kiddie tax rates were the trust tax rates instead of parents’ income tax rates. The kiddie tax rules were then changed for 2020 so that unearned income would again be taxed according to parents’ rates. The most recent changes also allow taxpayers to choose between the trust tax rate and regular income tax rate methods for determining how much kiddie tax they owe on their 2018 or 2019 taxes.
So if you haven’t paid your 2019 taxes yet, you can choose which rates you want to use. If you already filed and paid kiddie tax in 2018 or 2019 using the trust tax rates, but you would have saved money if you could have used the personal income tax rates, then you can now choose to amend your tax return and recoup any excess tax you paid. Lower and middle income tax filers may especially benefit from amending their tax returns.
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