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Kiddie Tax

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, in 2019 the first $1,100 of a dependent child's unearned income is tax-free (offset by the child's standard deduction), the second $1,100 of unearned income is taxed at the child's tax rate, and any amount over $2,200 is taxed at the rates for trusts and estates.

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. For details about that change, see a commentary from the CPA firm Concannon Miller.

The kiddie tax affects strategies for gifting company stock (see a related FAQ).

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