Understanding the Kiddie Tax: Tips for Parents to Save on Taxes

ARTICLE | November 26, 2024

Authored by Vasquez + Company

The "kiddie tax" prevents parents from shifting income-producing assets to children to take advantage of their lower tax rate. Introduced by the Tax Reform Act of 1986, the kiddie tax rules state that children with substantial unearned income face taxation at their parents' higher tax rates. This article explains the basics of the kiddie tax, how it’s calculated, and provides practical tips on how to minimize its impact.

Key Points:

• Unearned Income Threshold: For 2024, the kiddie tax applies when a child’s unearned income exceeds $2,600.
• Taxable Income Calculation: Net unearned income above the threshold is taxed at the parent’s rate.
• Strategies to Minimize the Kiddie Tax: Exploit the unearned income threshold, generate earned income, and select the right investments.
• Tax-Advantaged Accounts: Consider using 529 college savings plans or life insurance products to minimize exposure.

For more details, read the full article here.

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