Teen Investing Apps May Deliver a ‘Kiddie Tax’
Teens ages 13 to 17 can now learn to spend, save, and invest with a Fidelity Investments Youth Account, the company announced Tuesday. The fee-free account allows teens to buy and sell U.S. stocks, most exchange-traded funds and Fidelity mutual funds, reports CNBC.
Parents or guardians who currently have a Fidelity account can open a Youth Account where they can monitor account activity and set up alerts to be notified of trades, transactions and cash management activity. However, CNBC noted that parents may receive a “kiddie tax” bill during tax season.
The kiddie tax is an IRS tax rule (Topic No. 553) which taxes investment and unearned income of children. The purpose of this tax is to discourage parents from shifting wealth to their children to avoid paying taxes on part of their income. CNBC reported that before this tax rule, parents were investing through their children to reduce their taxable income.
For families filling out the Free Application for Federal Student Aid, known as FAFSA, extra investment income may also affect a student’s eligibility for federal financial aid. “You’ve got to look at things at a macro level from a household financing standpoint,” Sharif Muhammad told CNBC, certified financial planner as well as the founder and CEO of Unlimited Financial Services in Somerset, New Jersey.
According to the IRS, the kiddie tax may go into effect if the child’s interest, dividends and other unearned income total more than $2,200 or if the child’s only income is interest and dividend income, including capital gain distributions, and totals less than $11,000.
CNBC noted that this rule may impact children under 19 and full-time students aged 19 to 23 if they are still dependents on their parents’ tax return.
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