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Article Excerpt
The tax imposed by Sec. 1 (g) on the unearned income of minor children is commonly referred to as the "kiddie tax" Its purpose is to prevent wealthy parents from shifting unearned income or investment income to their children, who presumably are in a lower tax bracket. The Code achieves this by applying the parents' highest tax rate on the child's unearned income.
Earned income includes wages, tips, contract service income, self-employment net income, and other payments for personal services performed. Unearned income is generally investment income--e.g., interest, dividends, capital gains, rent, royalty, Social Security, and beneficiary distributions.
In 2006, the kiddie tax applied if the following conditions were met:
1. The child's unearned income exceeded twice the child's standard deduction of $850 (i.e., $1,700);
2. The child was under age 18 at the end of the year;
3. One of the child's parents was alive at the end of the year;
4. The child was required to file a tax return; and
5. The child did not file a joint return....
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