Investment Income of Your Minor Child

There are a group of special tax rules relating to the unearned income of a minor child. Collectively, these interrelated rules are referred to as the "kiddie tax." These special rules tax the unearned income of a minorchild at the parents' marginal tax rate if the child's unearned income exceeds $2,000 in 2014 ($2,100 in 2015). These amounts are indexed for inflation.

The kiddie tax is designed to discourage intra-family transfers of income-producing property, which shift income produced from such property from the parents' high marginal tax rate to the child's generally lower tax bracket, thereby reducing a family's overall income tax liability.

For purposes of the kiddie tax, a child born on January 1 is treated as turning a year older on December 31 of the prior year. For instance, a child born on January 1, 1995, is considered to be age 20 at the end of 2014, and a child born on January 1, 1991 is considered to be age 24 at the end of 2014.

A student is a child who was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency for some part of each of 5 calendar months during the year.

Unearned income includes all taxable income that is not earned. This includes:

• taxable interest, ordinary dividends, capital gains (including capital gain distributions);
• taxable social security benefits, pension and annuity income;
• taxable scholarship and fellowship grants not reported on Form W-2;
• rents, and royalties;
• unemployment compensation;
• alimony; and
• income (other than earned income) received as the beneficiary of a trust.

If a child is required to file a return, the parents have two options for reporting and paying the kiddie tax on the child’s unearned income.

• Reporting on the child's own return
• Reporting a child's income on your return

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