Kiddie Tax

A special tax on the investment gains and unearned income of minor children is popularly known as the kiddie tax. The kiddie tax was adopted to close a loophole in the tax law that allowed the shifting of income earning assets to minor children to avoid tax liability. The kiddie tax rule allows $750 of investment income to be tax-free. Investment income under the kiddie tax includes interest, dividend, and capital gains. The kiddie tax provides that the next $750 is taxed at the childs normal tax rate based on total income. The kiddie tax was established in 1986 and covers minor children who are under the age of 14 years as of December 31 of the taxable year. If the childs income exceeds $1,500, the income is taxed at the parents normal tax rate, not the kiddie tax rate.