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The informal name of a provision in the tax code that applies to a child's unearned income (such as interest, capital gains, and dividends). Under the kiddie tax, the first $1,050 of a dependent child's unearned income is tax-free (offset by the child's standard deduction), the second $1,050 of unearned income is taxed at the child's tax rate, and any amount over $2,100 is taxed at the rates for trusts and estates.
The "kiddie tax" used to apply only to children up to the age of 18 (and earlier only up to the age of 14), but since 2008, it has applied to young people up to the age of 24 if they are full-time students (unless they support themselves). In 2018, the Tax Cuts & Jobs Act changed the tax rate on income over the limit from the parents' rate to the rates for trusts and estates.
The kiddie tax affects strategies for gifting company stock (see a related FAQ).
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