Teens & Taxes: Does My Teen Have to Pay Kiddie Tax on Investment Income?
If your teen earns investment income, such as interest and dividends from stocks or bank accounts, and that amount totals more than $2,200, they are subject to the same income tax as adults. Deemed the “kiddie tax,” this law was introduced to prevent parents and guardians from transferring dividend-earning stocks and investments over to their children when seeking to avoid taxes or pay a lower tax rate.
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However, if your teen’s interest, dividends and capital gains distributions is less than $11,000 in 2021, you can claim the unearned income on your tax return instead of having your child or teen fill out their own return. This law — and related income thresholds — apply to teens aged 18 or younger, or young adults between the ages of 19 and 24 living at home and attending college full-time.
It might make sense to claim your teen’s investment income on your tax returns if they don’t have other income and wouldn’t need to file a federal or state tax return if not for their investment income. You can save the time and potential cost of tax prep.
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Any income over $2,200 is taxed at the same rate whether you claim the money or they do. And while you may have tax credits, deductions, and withholding taxes to offset the amount of non-investment income tax (NIIT) owed, your child probably does not. If they filed separately, they might have a tax bill to pay by April 18, 2022.
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