Kiddie Tax Rules 2023: When It Applies and How to Calculate It

Are you a parent looking to start saving for your children's future in 2023? If so, it's important to understand the Kiddie Tax Rules. As guardians of our families' finances, we must be aware of any rules or regulations that may affect our ability to save money for them.

The Kiddie Tax applies a federal tax rate to unearned income over certain thresholds. In other words, the amount of money kids can make from savings accounts, investments, stocks, and bonds. We will discuss when the Kiddie Tax is applicable and how you can correctly calculate it in 2023 so your family won't incur any unnecessary financial burden during tax season.

What Is The Kiddie Tax?

The Kiddie Tax was created in 1986 to prevent parents from transferring their income or investments into their children's names to evade taxes. It applies a federal tax rate for unearned income that exceeds certain thresholds and is typically paid by the child, although the parent may pay if claimed as a dependent on their return.

What Are the Kiddie Tax Rules for 2023?

The Kiddie Tax Rules 2023 will remain largely unchanged from the previous year.

• Unearned income exceeding $2,100 is subject to the Kiddie Tax for single filers and $4,200 for joint filers.
• A child's unearned income is taxed at the parent's marginal rate until it exceeds certain thresholds set by the IRS.
• The Kiddie Tax applies up to age 17 if the child has investment income over these thresholds.
• If the parent claims a dependent exemption for their child on their tax return, they may be responsible for paying any taxes due from the Kiddie Tax rules instead of having their child pay it themselves.
• The child must file Form 8615 with their tax return when claiming dependency but not claiming the Kiddie Tax.

Understanding the Kiddie Tax Rules and how they apply in 2023 is essential for any parent or guardian who wants to save money for their child's future. By taking the time to calculate these taxes correctly, you can ensure that your children will have enough financial resources when they reach adulthood.

Furthermore, understanding when and how to properly claim dependency exemptions can help reduce your tax burden during filing season.

When Does The Kiddie Tax Apply?

The Kiddie Tax applies to any unearned income above the following thresholds:

• Up to $1,050 if the child is under 18 at the end of 2023
• Up to $2,100 if the child is between 18 - 19 years old and not a full-time student during part of 2023
• Up to $3,650 if the child is between 19 - 23 years old and a full-time student during part of 2023

How To Calculate The Kiddie Tax In 2023?

To calculate the Kiddie Tax in 2023, you must first determine your child's total unearned income for the tax year. This includes any money they receive from investments, dividends, savings accounts, or other sources. You then subtract the abovementioned applicable threshold amount from their total income to arrive at their taxable amount.

Once you have this figure, you can apply either the parent's marginal tax rate or the trust tax rates (depending on which is higher) to determine how much of that income your child owes in taxes. To ensure you arrive at the correct figure, it is always best to consult with a tax professional or accountant before filing your return.

Here’s the formula

Taxable Income = Net Income + Net Unearned Income – Standard Deduction

The Kiddie Tax Rules are important to understand when planning for your family's future and saving for your children's.

Make sure you factor this into your overall financial plan to ensure you won't incur any unnecessary tax burden on April 15th. Knowing when the rules apply and how to correctly calculate them will help keep more of your hard-earned money in your pocket.

Here’s how to calculate Johnny’s tax liability

Johnny is 18 and has a net income of $2,000 and a net unearned income of $1,500.

Taxable Income = $2,000 + $1,500 – $2,100 (threshold) = -$600

Since Johnny's taxable income is negative (-$600), he does not owe any taxes under the Kiddie Tax Rule in 2023. However, if his net unearned income had been higher than $2,100, he would have owed taxes on that amount according to the parent's marginal tax rate or the trust tax rates (whichever is higher).

Make sure you consult with a licensed tax professional before filing your return to accurately calculate how much you owe in taxes for the Kiddie Tax.

The Kiddie Tax Rules can be complex and daunting, but understanding them is the key to avoiding any unnecessary financial burden for your family.

Knowing when these rules apply and how to calculate them correctly will help ensure that your children are well taken care of now and into adulthood.

By taking the time to understand the Kiddie Tax Rules in 2023, you can rest assured that your family's finances are well-managed and protected. With this knowledge, you can confidently save money for your child's future without any added stress of tax season.

Can You Reduce or Avoid Paying Kiddie Tax?

Depending on your situation, you can do a few things to reduce or avoid paying the Kiddie Tax.

Suppose your child is only earning income from interest and dividends. In that case, you can take advantage of tax-advantaged investments such as Education Savings Accounts (ESAs), 529 plans, or Roth IRAs.

These accounts offer tax benefits that help offset some of the taxes due on unearned income.

Another way to reduce the burden of the Kiddie Tax is to claim a dependent exemption for your child on your return. This means that if their unearned income exceeds certain thresholds, you will be responsible for any taxes due instead of them having to pay it themselves.

Finally, you can reduce or avoid paying the Kiddie Tax by transferring excess income or investments into your child's name. This is not recommended as it could have serious legal and tax implications if done improperly, so it is important to consult a tax professional before making any decisions.

FAQS

What is the tax structure for 2023?

The tax structure for 2023 is determined by the Tax Cuts and Jobs Act of 2017. This act changes the marginal tax rates, standard deductions, and other deductions available to taxpayers. For more information about these changes and how they will affect your taxes in 2023, please consult a qualified tax professional or accountant.

What is the support test for kiddie tax?

The support test for the Kiddie Tax requires that the child receive more than half of their support from their parents to be eligible. This support test includes food, clothing, shelter, education, medical and dental care, recreation, transportation, and other necessities. If your child does not meet this requirement, they are not eligible for the Kiddie Tax.

Can I claim a dependent exemption for my child in 2023?

You can still claim a dependent exemption for your child in 2023. This means that if their unearned income exceeds certain thresholds, you will be responsible for any taxes due instead of them having to pay it themselves. However, this may not reduce the total amount owed; it may only shift who pays the taxes. Consult a tax professional to determine if this is the most beneficial option for your family.

Conclusion

As you can see, the Kiddie Tax has beneficial aspects for investing and taxation that can benefit those under age 18 or age 24 if a full-time student. The Kiddie Tax Rules are simpler than they seem, and tools are available to help you calculate it accurately if necessary. It's important to familiarize yourself with these rules to take full advantage of them in 2023.