The kiddie tax is a set of tax rules aimed to keep parents from taking advantage of their children’s lower tax rates. Basically, if your child has substantial investment income, it will be taxed at the parent's rate, not the child's.
In 2007, the first $850 of a child’s investment income was tax free, and the next $850 was taxed at the child’s own tax rate. Any investment income of children under 18 that exceeded $1,700 was taxed at the parent’s marginal rate.
In 2008, the kiddie tax applies to dependents under 19 or those who are full-time dependent students under 24. Thus, many college-age children with investment income are affected. Children who provide more than half of their own support are not affected by the kiddie tax as they will pay tax at their own rate.
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