What does the "kiddie tax" apply to?

What does the "kiddie tax" apply to?

• A. The earned income of children under 18
• B. The net investment income of children under 19
• C. The unearned income of children under 19, taxed at the parent's tax rate
• D. All income of children under 21

Answer: (C)

The "kiddie tax" applies specifically to the unearned income of children under the age of 19, and this income is taxed at the parent's tax rate if it exceeds a certain threshold. This tax is designed to prevent families from shifting large amounts of investment income to their children, who would typically be in a lower tax bracket. Unearned income includes sources such as dividends, interest, and capital gains. The application of the kiddie tax ensures that this type of income is taxed more similarly to how it would be taxed if it were earned by the parents, thereby reducing potential tax avoidance strategies. In terms of age limits, while the general application is for children under 19, there are also specific conditions under which the tax can apply to dependents who are full-time students up to the age of 24. However, the essential core of the kiddie tax principle focuses on unearned income and its taxation in relation to the parent's taxable income, which is precisely why the correct interpretation relates to the unearned income of children under 19.

The "kiddie tax" applies specifically to the unearned income of children under the age of 19, and this income is taxed at the parent's tax rate if it exceeds a certain threshold. This tax is designed to prevent families from shifting large amounts of investment income to their children, who would typically be in a lower tax bracket.

Unearned income includes sources such as dividends, interest, and capital gains. The application of the kiddie tax ensures that this type of income is taxed more similarly to how it would be taxed if it were earned by the parents, thereby reducing potential tax avoidance strategies.

In terms of age limits, while the general application is for children under 19, there are also specific conditions under which the tax can apply to dependents who are full-time students up to the age of 24. However, the essential core of the kiddie tax principle focuses on unearned income and its taxation in relation to the parent's taxable income, which is precisely why the correct interpretation relates to the unearned income of children under 19.