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). This tax applies to children under the age of 19 (for full-time students, under the age of 24). Under the kiddie tax, in 2020 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 parents' top marginal tax rate.
Alert: At the end of 2019, Congress repealed a provision in the Tax Cuts & Jobs Act that had made the rate over $2,200 the tax rates for estates and trusts. This move restored the rate to the parents' top marginal tax rate, with effect from 2020. The legislation is in the SECURE Act (Section 501 of the original bill, which became part of the Further Consolidated Appropriations Act 2020). For 2019 income, and retroactively for 2018 income, taxpayers can choose which rate to apply, as explained in a commentary from the website of financial advisor Michael Kitces and an article at Forbes.com.
The kiddie tax affects strategies for gifting company stock (see a related FAQ). For more on the kiddie tax, see an article at NOLO.com and a blog commentary at Forbes.com.