Legal Definitions - kiddie tax

Kiddie tax is a type of tax that is imposed on the unearned income of children under the age of 18. This tax was introduced to prevent parents from transferring their investment income to their children to avoid paying higher taxes.

• If a child receives $1,000 in interest income from a savings account, the kiddie tax may apply to that income.
• If a parent transfers stocks to their child and the child earns a profit from selling those stocks, the kiddie tax may apply to that profit.

These examples illustrate how the kiddie tax applies to unearned income that is generated by children. The purpose of this tax is to ensure that parents cannot use their children's lower tax rates to avoid paying higher taxes on their own investment income.