Does Kiddie Tax Apply if a Child Is Not a Dependent?

The “kiddie tax” is designed to prevent parents from shifting investment income to children to take advantage of a child’s lower tax bracket. A common question is whether these rules apply if a child is not claimed as a dependent. The answer is not based on dependency status, but on a specific set of criteria established by the IRS for children with unearned income from sources like investments, interest, or dividends.

Core Kiddie Tax Applicability Rules

The kiddie tax applies if a series of specific tests are met, focusing on the child’s age, income, and level of self-support. A child who is not a dependent can still be subject to these tax provisions if they meet the criteria.

The first condition is the age test. The kiddie tax applies to children under age 18 at the end of the tax year. The rules also extend to children who are age 18, or full-time students between ages 19 and 23, if their earned income does not exceed half of their support for the year.

Another condition is the unearned income test. For the 2024 tax year, the kiddie tax is triggered if a child has unearned income of more than $2,600. Unearned income includes investment returns such as interest, dividends, and capital gains, as opposed to earned income from a job.

The final condition is the support test. The kiddie tax applies if the child does not provide more than half of their own support with their earned income. This means that even if a child uses substantial investment income or gifts to pay for living expenses, they are not considered to be supporting themselves for this rule.

Two other requirements for the tax to apply are that the child must be required to file a tax return and must not file a joint return for the year.

Determining if a Child Provides Their Own Support

To determine if a child provides more than half of their own support, you must first calculate their total support for the year. This figure includes all amounts spent on necessities and comforts, such as:

• Lodging (at fair rental value)
• Food and clothing
• Education expenses
• Medical and dental care
• Recreation and transportation

Once the total support amount is established, identify the funds the child used for these expenses. To avoid the kiddie tax, the child must provide more than half of their support from their own earned income. Earned income is compensation for personal services, such as wages from a job. Funds from other sources, like investment income or gifts, do not count toward this support test.

For example, a 20-year-old full-time college student has total support costs of $30,000 for the year. The student earns $16,000 from a part-time job and has $20,000 in dividend income. Although their total income of $36,000 exceeds their support costs, only the $16,000 of earned income is considered for the support test.

To determine if the student provided more than half of their support, their earned income is compared to the total support amount. Half of the total support is $15,000 ($30,000 / 2). Since the student’s earned income of $16,000 is greater than $15,000, they have provided more than half of their own support with earned income and would not be subject to the kiddie tax.

Calculating the Kiddie Tax

If the kiddie tax applies, the calculation is performed using IRS Form 8615, “Tax for Certain Children Who Have Unearned Income.” This form must be attached to the child’s tax return, not the parents’ return. However, information from the parents’ return is necessary to complete it, as the form applies the parents’ tax rates to the child’s net unearned income.

To complete Form 8615, you will need specific information from both the child’s and parents’ tax situations, including:

• The child’s total unearned income
• The parents’ taxable income from their Form 1040
• The parent’s name and Social Security number
• The unearned income of any other children subject to the kiddie tax

The calculation on Form 8615 taxes a child’s unearned income above a certain threshold at the parents’ top marginal tax rate. For the 2024 tax year, the first $1,300 of unearned income is not taxed. The next $1,300 is taxed at the child’s own tax rate, and any unearned income exceeding $2,600 is subject to the parents’ tax rate.

Form 8615 guides you through a multi-part calculation. It first determines the child’s net unearned income. It then calculates a tentative tax by using the parents’ tax information to find the tax allocable to the child. The final step is to determine the child’s total tax liability, which is then reported on their Form 1040.