Will the kiddie tax apply to you?

Kiddie Tax - What you need to know

Got college-bound kids? Then you might have questions about the kiddie tax, since these federal rules can apply to the unearned income of full-time students up to age 24.

Here’s an overview of the rules.

* The basics. The kiddie tax affects how much you’ll pay on part of the investment income your child receives, such as interest or dividends. When the rules come into play, this “unearned income” is taxed using your rates.

* How the tax is applied. For 2010, the first $950 of your child’s unearned income is tax-free. Tax is calculated on the next $950 using your child’s federal tax rate, which can be as low as 5%. Unearned income over $1,900 is taxed at your federal income tax rate, when that rate is higher than your child’s.

For an 18-year-old, the kiddie tax applies when your child’s earned income â?? that is, money received from wages, salary, tips, commissions, and bonuses â?? is less than half the cost of providing necessities such as food, clothing, and shelter.

The same 50% support exception applies when your child is a full-time student and age 19 through 23.

* Planning tip. Consider hiring your college student in your family business. Wages are earned income and can lessen or eliminate the kiddie tax.

Still have questions about the kiddie tax? Give us a call. We have answers, information, and planning strategies.

David Bradsher, CPA  is a Washington DC / Northern Virginia area CPA who works with small business owners and non profit leaders on a monthly basis to provide them with guidance and advice on how to grow their organizations, minimize their tax liabilities and increase their bottom line.